At the time, geopolitical tensions in the Middle East (namely between Israel and Iran) ratcheted up again this week, stock markets in America — including the S&P 500 — continue to power higher. This is confusing to the majority of people. War, instability should rattle investor confidence Shouldn’t war and instability shake the resolution of investors?
But markets are proving breathtakingly resilient. Nor is this anything new, according to analysts at Deutsche Bank. Indeed, history shows that stocks frequently shake off geopolitical shocks more quickly than many imagine.
So what’s driving that startling strength in the context of global risk?
Markets vs. Headlines: An Age-Old Rift
While war and political upheaval carry an emotional impact, stock markets trade on future earnings expectations, interest rates and the mood of investors not daily news snapshots.
That’s why, despite increasing violence in the Middle East and fears of escalation, the S&P 500 has displayed little sign of panic. If anything, investors appear to be taking a view about the short-term risks that goes beyond positive corporate profits data, stable inflation trends and the prospect of rate cuts.
Or in the words of one strategists at Deutsche Bank:
“Markets tend to overreact early, but they rebound provided the conflict doesn’t escalate into a significant economic shock.”
How the S.&P. 500 Reacts to War: Historical Patterns
And data that goes back years shows that geopolitical shocks, however dramatic, frequently have only a short-term impact on the stock market.
Here’s what history teaches us:
- Trade fell briefly during the early 1990s Gulf War but rebounded shortly afterward.
- The 2019 Iran-US standoff created volatility but didn’t produce a sustained down market.
- Not even the 2022 Russia-Ukraine war, which roiled energy markets, had as lasting or heavy an effect on U.S. stocks.
In both instances though, the market in due course returned to domestic economic fundamentals.
What Investors Are Watching Now
Today’s market isn’t blind to risk; instead, it is quite selective about what it does and doesn’t price in.
Here are the some reasons stocks are staying strong despite conflict:
Economic Resilience
The U.S. economy remains buoyant, unemployment is low and corporate earnings are strong, all factors keeping market sentiment steady if choppy.
Interest Rate Optimism
With inflation cooling, investors anticipate the Federal Reserve lowering interest rates in coming months a fillip for stocks.
Lack of Direct Economic Impact
The Israel-Iran tensions are serious, but they have not ended (so far) in a significant global disruption of oil supply or trade routes, which would affect markets more directly.
Investor Psychology
A lot of institutional investors are now programmed to see dips in the market as buying opportunities, especially if they are caused by some geopolitical fear.
Could This Change?
Yes and quickly.
Should Middle East tensions rise further, hitting oil prices, shipping routes or involving wider regional instability, there could be more pressure on markets. The variables to look for are:
- Any significant increase or sustained increase in crude oil prices
- Spreading of the war outside Israel and Iran
- THE PARTICIATION OF THE WORLD’S LEADING POWERS – Burckhart Mettke, Germany Significant involvement of the world’s leading powers possible could radically change the perception of risk.
In other words: that calm could be temporary — and investors need to stay sharp.
Rational or Risky?
The market’s resilience may seem cold in the face of human suffering, but it is an entirely rational focus on economic outcomes — not emotional response. This is not to say investors are ignoring the headlines — they’re valuing how much those headlines impact bottom lines.
As with everything: timing and flexibility are critical. There should be long-term opportunities for investors amid the volatility, but geopolitical uncertainty is something that no model will ever fully account for.
So long as the economic consequences of the conflict remain broadly in check, the S&P 500’s ascent to new highs is likely to persist even if things feel far less stable on the world outside Wall Street.
