Even as the Iran conflict stokes geopolitical tensions and sustains high energy prices, stocks held up better than might be expected. Better still, markets may stabilize thanks to persistently strong corporate earnings.
Though global oil prices have gyrated day to day in response to new developments, they remain sharply higher than pre-conflict levels at around $100 per barrel. And oil futures markets continue to signal supply tightness in the near term.
Historically, oil shocks have often triggered recessions and bear markets. Yet even at its maximum drawdown in response so far to the Iran conflict, the S&P 500® Index benchmark fell less than 10%, as expectations for accelerating earnings growth among S&P 500 companies offset price-to-earnings (P/E) valuations that declined by as much as 20%. By April 14, the US large-cap stock benchmark was up nearly 2% this year, just 1% shy of its all-time high set January 27.
In short, things could be worse.
“The cyclical bull market, now 45 months strong, has been bent but not broken,” says Jurrien Timmer, Fidelity’s director of global macro research. “In the grand scheme of history, a 10% decline happens about every other year. One might say that’s not much, given all the bad stuff going on.”
Said another way, stock prices have fallen less than would be expected because corporate profits are still growing fast. The forward earnings estimate has been growing at a robust 17% annual rate, and the momentum has thus far not been affected by the headlines.
Profit margins, a measure of how much money a company keeps after paying its expenses, have also been reaching new highs—around 15% in early April for the S&P 500—helping sustain stock valuations.
Indeed, the volatility of the early days of the Iran conflict had, by April, moderated amid growing optimism that more oil tankers would pass through the Strait of Hormuz, easing the global crunch in oil and natural gas supply.
