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The Iran war isn’t over, but stocks have rebounded from their war-driven sell-off, with the S&P 500 approaching a fresh record high on Tuesday amid optimism for a peace deal.
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Economic data has recently eased fears that higher oil prices would fuel a sustained acceleration of inflation and drag on consumer spending, the engine of the U.S. economy.
In the Middle East, not much has changed on the ground in the past week—fighting continues in Lebanon, the Strait of Hormuz remains effectively closed, and negotiators left this weekend’s peace talks empty-handed. On Wall Street, traders see things differently.
The S&P 500 gained 1.2% on Tuesday, boosted by optimism for a lasting agreement between the U.S. and Iran that will end the war and reopen the Strait of Hormuz, the closure of which caused energy prices to skyrocket. Tuesday’s gains put the benchmark index at a two-month high and just 11 points, or 0.2%, away from an all-time closing high. (Follow Investopedia‘s live coverage of today’s trading here.)
“There is a clear ‘mission accomplished’ tone being priced into markets as the ceasefire appears to be holding and talks set to move forward,” wrote Jake Behan, head of capital markets at ETF provider Direxion, on Tuesday.
The stock market, like the U.S. economy, has proved incredibly resilient to a variety of shocks in recent years. Investors may be feeling confident that, barring the worst case scenario, a stock market that’s already charged higher through trade uncertainty, stubborn inflation and elevated interest rates, can weather more uncertainty.
Optimism was buoyed on Tuesday by reports the U.S. and Iran will resume negotiations this week, as well as a much softer-than-expect wholesale inflation report that eased some fears about the effect a spike in oil prices will have on inflation in the coming months. Investors are also confident that corporate America had a strong first quarter, with analysts forecasting double-digit profit growth for the S&P 500.
“Notably, there’s been little evidence of meaningful demand destruction tied to the conflict, which suggests the underlying growth backdrop remains intact heading into any resolution,” said Behan.
Consumer spending continued at a healthy clip last month, according to a Bank of America analysis of its clients’ debit and credit card spending. Aside from gas, the price of which rose steadily across the country last month, the spending categories that posted the biggest monthly increases were electronics, home improvement and department stores, the kind of discretionary spending one would expect to see decline against a bleak economic backdrop.
BofA attributed the resilience of consumer spending in part to the stock market’s relatively sanguine response to the Iran war. Even at the depths of last month’s sell-off, the S&P 500 still avoided a correction, or a 10% decline from its January highs. As a result, the higher-income cohorts who make up an increasing share of consumer spending felt comfortable to keep spending. According to BofA, a 20% decline in the stock market would likely be required for higher income households to rein in their spending.
To be sure, experts note the U.S.-Iran ceasefire is a tenuous one. Both sides are far apart on some key points, including Iran’s right to enrich uranium and a system for overseeing the Strait of Hormuz. And, with traffic through the strait still a fraction of its pre-war levels, global oil supply is, at best, months away from anything resembling normal.
Ben May, director of global macro research at Oxford Economics, forecast on Monday that it will take up to eight months for oil shipments through the strait to reach pre-war levels. May expects Brent crude, the global oil benchmark, to end the year around $80 a barrel, down from $95 today and nearly $110 before last week’s ceasefire announcement, but up from $73 before the war.
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