Why Does the Iran Conflict Leave Stockholders Cold?

In the initial weeks of the conflict between the United States and Iran, global markets reacted predictably. Rising oil prices, fueled by fears of a blockade of the Strait of Hormuz, stoked inflation concerns, potentially leading to interest rate hikes. Higher interest rates typically depress stock prices as other investments become more attractive and future corporate profits are valued less. Consequently, stock markets declined when the risk of escalation increased and rose when signs of de-escalation emerged.

However, a remarkable shift began around late March or early April. While oil prices and government bond yields continue to follow geopolitical developments, stock markets, particularly the S&P 500, have predominantly moved upward, reaching new records regardless of events in Iran. This divergence is particularly evident since April 7, when President Donald Trump announced a preliminary ceasefire.

For instance, Brent crude oil prices fluctuated significantly between $90 and $118 per barrel in April and May, reflecting the volatile geopolitical situation. Similarly, the yield on 10-year U.S. Treasury notes, a key indicator of market sentiment, moved between 4.3 percent and 4.7 percent during the same period. Analysts generally expect lower yields with sustained peace and higher yields with escalation.

In stark contrast, the S&P 500 index has shown remarkable resilience. Starting at around 6600 points on April 7, it climbed steadily, surpassing 7500 points by mid-May and setting over 20 new all-time highs. The index gained approximately 15 percent during this period. This disconnect between traditional market reactions to geopolitical risk and the current stock market performance prompts questions about the underlying drivers of market behavior.