The Middle East conflict has raged for over a month, yet Wall Street seems to have hit the mute button. US equities have recently ignored geopolitical risks and staged a powerful comeback.
The S&P 500 index has rebounded nearly 10 percent since March 27. The tech heavy Nasdaq 100 index surged about 12 percent over the same period. It closed higher for 10 consecutive trading days, marking its longest winning streak since 2021.
The S&P 500 fully recovered all losses incurred since the onset of the US Iran conflict during trading on Monday. This indicates market sentiment has shifted from extreme panic to an unusual calm.
Goldman Sachs Delta One desk head Rich Privorotky stated that the market appears to have unilaterally declared victory in the conflict with Iran, given this reality defying rally.
Privorotky noted that Houthi militants have not escalated their actions in the Red Sea and the ceasefire agreement remains intact despite the ongoing war.
Goldman Sachs strategist Chris Hussey observed that the stock market is acting as a forward looking mechanism. Equities are already pricing in an imminent end to the conflict on the bumpy road to ultimate peace.
BCA Research investment strategist Doug Peta pointed out that both the stock market and the broader financial sector currently care little about the situation in the Strait of Hormuz.
This apathy driven rebound is fueled by massive gains in tech giants. The Magnificent Seven, acting as artificial intelligence leaders, surged 3 percent in a single day and accumulated a 15 percent gain over the past 10 trading days.
Semiconductor stocks are leading the charge. Bloomberg data shows their profit expectations jumped about 10 percent in just three trading sessions.
Goldman Sachs data reveals that Nvidia and Micron are projected to account for over 50 percent of the S&P 500 earnings per share growth this quarter.
This frenzy extends beyond equities as capital rapidly exits safe haven assets. US Treasury yields have fallen alongside oil prices while Bitcoin breached the 76000 dollar mark. The US dollar has erased all gains made after the war began. Market liquidity has improved significantly, with S&P liquidity rebounding sharply from its trough.
Extreme institutional positioning is the driving force behind this panic buying. Senior traders reveal that capital flows are almost entirely one sided, with commodity trading advisors and various clients aggressively chasing the rally.
Nationwide chief market strategist Mark Hackett indicated that institutional investors are refocusing on fundamentals following the sell off, supported by robust economic data.
This resembles a short squeeze driven by covering. Goldman Sachs data indicates that long only and hedge funds are net sellers, offloading shares to aggressively buying commodity trading advisors.
Goldman Sachs analysis suggests the strength of the Magnificent Seven stems from the covering of geopolitical hedges, the conclusion of capital reallocation, and strong earnings expectations.
The fundamental backdrop appears to have stabilized. First quarter results released this week by banking giants including JPMorgan Chase and Citigroup show that US households and businesses remain resilient despite inflation and geopolitical uncertainties. Cooling inflation data has also provided reassurance to the market.
A rare divergence has emerged between the stock and oil markets. WTI crude oil fell below 91 dollars on expectations that Iran might temporarily suspend some oil exports to gain negotiating leverage. The crude forward curve indicates that resolving supply disruptions will take time, standing in sharp contrast to the mission accomplished optimism in equities.
Wall Street veterans remain cautious despite elevated market sentiment. RBC strategist Lori Calvasina warned that war related uncertainties could trigger a severe growth panic correction at any moment.
Hackett also believes the S&P 500 will struggle to break historical highs before substantial progress is made in peace talks. Bond investors remain skeptical about the sustainability of current inflation trends.
Veteran investor Ed Yardeni is optimistic that the S&P 500 bottomed on March 30, yet he acknowledges the market is learning to coexist with the conflict.
This serves as a vivid lesson for investors that the market always runs ahead of reality. It just might be running a bit too fast this time.