U.S. equities have recovered to roughly the same level they stood at when the Middle East hostilities began more than six weeks ago, a recovery investors attribute to a widespread belief that the conflict will be brief. That rebound comes even as the investment landscape has shifted markedly since late February, with oil prices up about 40%, inflation concerns nudging Treasury yields higher and expectations for interest-rate cuts this year largely removed from market pricing.
"There’s a lot of complacency that this can resolve itself fast. What’s priced in is that we have an off-ramp," said Brad Conger, chief investment officer at Hirtle Callaghan. "I think we’re a lot worse off than February 27th, and we’re at the same price." Conger highlighted a contrast between market levels and what he views as a weaker fundamental backdrop compared with late February.
Investors have countered those headwinds by leaning on two main pillars: an improved earnings outlook for U.S. companies since the start of the crisis, and a pervasive reluctance to sit out potential gains after more than three years of a bull market. Those forces have underpinned demand for equities despite risks tied to energy and interest rates.
Where the market stands
The S&P 500 fell sharply in the initial weeks after the conflict began, and by late March had closed more than 9% below its late-January record, approaching a correction threshold of 10%. Since then the index has recovered. On Monday the S&P 500 was essentially flat relative to its level when the war began, up 0.1%, and it sat just over 1% shy of its record high. Stocks continued to move higher on Tuesday, with the S&P 500 last trading about 1% higher on the day.
Optimism that the fighting will ease gained traction after a two-week ceasefire agreement reached last week, yet many unknowns remain and investors continue to brace for potential bouts of volatility tied to war-related developments. Peter Tuz, president of Chase Investment Counsel Corp., described the market’s prevailing view as one that treats the conflict as "temporary risks which will be overcome in fairly short order, as opposed to being the start of a new ... regime of higher inflation, higher energy prices, higher interest rates." He added that if a new regime of persistently higher inflation and rates were in place, the market would likely not appear as resilient as it does now.
Energy’s role in the outlook
Movements in oil prices are central to the equity outlook. Sustained higher crude could sap consumer spending through more expensive gasoline and raise costs for businesses, creating a drag on economic growth and corporate margins. Yet market pricing suggests investors expect this energy-driven shock to be short-lived.
Angelo Kourkafas, senior global investment strategist at Edward Jones, pointed to a widening gap between near-term and year-end crude contracts as evidence that the market expects oil to moderate later in the year. The front-month contract for U.S. crude is trading around $95 a barrel, while the December contract sits at $77, according to LSEG data. "Markets are now seeing the energy disruption as something that is near-term," Kourkafas said. "There is this notion that, yes, there is a lot of near-term disruption, but it is temporary in nature. And then once we go past that, we’re going to go back to the prevailing economic resilience that we had before."
The jump in oil has already shown up in official inflation metrics. The monthly Consumer Price Index rose in March by the most in nearly four years, a development that has nudged investors to scale back expectations for Federal Reserve easing this year.
Interest-rate expectations and bond yields
Inflationary pressures tied to higher oil have been a key factor pushing up Treasury yields. The benchmark 10-year Treasury yield has risen to about 4.3% from 3.96% on February 27. That increase in yields can create headwinds for equities by raising borrowing costs for businesses and consumers and by providing investors with a higher-return alternative to stocks.
The shift in the inflation picture has also altered expectations for the timing and extent of Federal Reserve policy easing. Fed funds futures were last pricing in only about 6 basis points of easing by December, according to LSEG data, effectively pricing out a full 25-basis-point cut that had been anticipated by the market before the conflict. Prior to the war, roughly two quarter-point cuts had been expected by December.
Earnings expectations buoy markets
Perhaps the single most supportive factor for equities has been an upgraded outlook for corporate profits. Consensus estimates for S&P 500 company earnings show a stronger trajectory, with expected earnings growth of 19% in 2026, up from a 15% increase that was projected before the war began, according to LSEG IBES.
That improvement has made stocks appear more attractive on a valuation basis. The price-to-earnings ratio for the S&P 500, based on the next 12 months of profit estimates, stood at 20.4 on Monday, down from over 23 in late October, according to LSEG Datastream. "Estimates keep going higher despite the surge in oil prices and the implications that has for inflation," said Chris Fasciano, chief market strategist at Commonwealth Financial Network. "More attractive valuations and higher earnings estimates make me feel OK about the backdrop."
Still, the robustness of those forecasts will face a test in the weeks ahead as companies report first-quarter results. "People are really expecting astounding earnings growth from companies in aggregate this year," Tuz said. "It’s way too early to say whether it’s going to prove to be an accurate number or not."
Investor posture and takeaway
Investors seem to be balancing a mix of factors: the hope for a swift de-escalation of the conflict, an upgraded profit outlook and the risk of missing out in a long-running bull market. At the same time, energy-driven inflation and the associated rise in bond yields have trimmed the likelihood of interest-rate relief this year, altering the calculus for asset allocation.
Market participants who emphasize valuations and earnings momentum see a path that justifies current stock levels. Others warn that the combination of higher oil, rising yields and the potential for a longer conflict could pose material downside risks if those factors prove persistent.
For now, the market’s view that the geopolitical shock is temporary is a central assumption supporting equity prices. If that assumption holds, investors and companies may find limited disruption to the broader economic resilience that underpinned markets before the crisis. If it does not, the implications for inflation, rates and corporate profitability could be more challenging.