The S&P 500 approached a fresh record high on Wednesday, reflecting investors’ optimism that a peace deal would be reached before the war in Iran could inflict significant damage on corporate America, even as a spike in oil prices has led to a gloomier economic outlook.
In early afternoon trading, the S&P 500 rose 0.4 percent, putting the widely watched index on track to end the day above its previous peak, reached in January. The index had already erased its losses during the war in Iran and now sits nearly 2 percent higher than it was before the fighting began in late February.
Investors have been embracing signals in recent days that the United States and Iran could restart talks that ended last weekend in Pakistan without a deal but with comments from President Trump that he believed the war was nearing an end.
The mere posture toward peace has helped to placate the stock market. Since the cease-fire took hold last week, investors have noted a shift in tone by the Trump administration that reflects a desire to end the conflict soon.
“The market is trading assuming we have seen the worst of the conflict,” said Stefano Pascale, an equity analyst at Barclays.
The S&P 500 has risen over 2 percent already this week, putting the index on course for its third straight week of gains, the kind of winning streak not seen since October. The index has risen 9.8 percent since March 30 — the nadir of the recent sell-off.
Still, some market watchers have been perplexed by the recent rally, which has taken place as the Strait of Hormuz, the narrow waterway on Iran’s southern coast that serves as a crucial shipping lane for the world’s oil supply, has remained throttled. Even if a formal peace deal is achieved between the United States and Iran, it could take a long time to get ships moving again and repair damage to ports and other oil facilities. High oil and gas prices have been feeding into rising U.S. inflation and tumbling consumer confidence.
The International Monetary Fund said on Tuesday that disruptions to oil markets could slow growth, fuel inflation and raise the possibility of a global recession. Even if the war is short-lived, the damage to the global economy has been done, the I.M.F. warned as it cut its forecasts for economic growth.
“What is a little strange is that there is a tendency by some to assume that it’s business as usual,” Christine Lagarde, the president of the European Central Bank, said on Tuesday when asked about the seeming exuberance of markets at an event held by Bloomberg in Washington.
The longer oil markets are disrupted from the conflict, the greater the risk to the global economy and to financial markets. But in a further sign that equity investors already consider the end of the war to be in sight, stocks have rallied in recent weeks even on days when oil prices have risen.
A widely watched monthly fund manager survey by Bank of America, conducted over the week through April 9, showed the most bearish outlook among investment managers since June of last year. Expectations for economic growth plummeted in the latest survey and the outlook for inflation shot higher.
But importantly, few responded that they thought this would lead to a recession. And without a recession, investors have been able to return to focusing on the otherwise strong backdrop provided by corporate earnings that kicked off this week.
Analysts expect a sixth straight quarter of double-digit earnings growth, with some anticipating the best earnings season in roughly five years. And that has provided solid support for valuations to shrug off March’s market struggles.
“As corporate earnings are the biggest driver of stock returns, this level of steadfast earnings growth is an incredibly positive sign given that the market has been hammered in the first quarter by the effective closure of the Strait of Hormuz, which has sent oil prices skyrocketing to some of their highest levels in decades,” said Hardika Singh, a strategist at Fundstrat.
JPMorgan Chase, the banking bellwether, on Tuesday reported a $17 billion profit for the first three months of the year, considerably more than analysts expected. The bank slightly lowered its forecast for profits in the remainder of the year, but still expects to earn more than $100 billion. Its executives expressed worry about energy costs weighing on consumers but stressed that the labor market remained healthy. Goldman Sachs, Citi and Bank of America also reported strong profits this week.
Bolstering the signal sent by the S&P 500, the Russell 2000 index of smaller companies — typically seen as more susceptible to economic shocks — has also rallied sharply. The index has risen over 12 percent since March 30 and began trading on Wednesday just 0.5 percent away from its January record.
Big technology companies have led the S&P 500 higher but the recovery has been broader than just the darlings of the artificial intelligence boom. More than 80 percent of the companies in the S&P 500 are now higher than they were on March 30.
However, just as the stock sell-off had been somewhat contained by an awareness that this administration could change its mind quickly, many analysts are urging a similar caution as the market now moves higher.
U.S. stocks are still facing “two-tailed risks,” analysts at Bank of America noted.
The rise in energy stocks, which had been boosted by the rise in oil prices stemming from the war, has now faded. Shares of consumer staples like General Mills or Dollar General remain significantly lower than before the war began, with both companies down more than 20 percent since the end of February. Roughly two-thirds of the companies in the S&P 500 remain lower than they were when the war began.
“The obvious risk is that we have not seen the worst of the conflict,” Mr. Pascale said.
Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.
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