Three weeks ago the US and Iran were exchanging fire. The Strait of Hormuz was closed. Oil was above $110. Inflation hit 3.3%. A $67 billion hedge fund manager said recession was unavoidable.
Last Thursday the S&P 500 crossed 7,000 for the first time in history.
That is not a typo. Markets just hit an all-time record high in the middle of an active war that has disrupted 20% of the world’s oil supply. And most people have no idea how to make sense of it.
Here’s the explanation.
Markets Price the Future, Not the Present
The most important thing to understand about stock markets is that they don’t reflect what’s happening right now. They reflect what investors collectively think will happen six to twelve months from now.
When the war started in late February, markets sold off because investors were pricing in a long, damaging conflict. When the ceasefire was announced in April, markets rallied hard – not because the war was over, but because investors started pricing in a world where the war would eventually end and things would normalise.
That’s the key. Markets aren’t saying the war is fine. They’re saying they believe the war will end, oil will come back down, and the economy will recover. Whether they’re right is a different question.
The Numbers Tell the Story
At the worst point of the war, the S&P 500 was down more than 7% from its January high. That sounds like a lot. But consider what was happening – a major oil chokepoint closed, inflation spiked, and the Fed signalled no rate cuts.
The recovery from that low to a new all-time high took just 53 trading sessions. For context, after last year’s Liberation Day sell-off, the same recovery took 88 sessions. The market bounced back almost twice as fast this time.
The VIX (Wall Street’s fear gauge) surged above 30 when the war began. A reading above 30 signals acute fear in markets. It’s back below 18 today. That move from above 30 to below 20 happened in just eight trading sessions. One of the quickest reversals ever recorded.
Four Reasons Markets Kept Climbing
First, earnings. While the war dominated headlines, companies were quietly reporting strong profits. JPMorgan reported a 13% rise in profits. Goldman Sachs had their second best quarter ever. Morgan Stanley beat estimates by nearly $1 billion in trading revenue. BlackRock, Citigroup, Wells Fargo, Bank of America — all beat expectations. The actual businesses underlying the stock market were doing well.
Second, tech. Nvidia is up 18% over the past ten days alone. The AI story didn’t pause for the war. Semiconductor stocks surged back. Large cap tech extended a winning streak to 12 consecutive days, one of the longest on record. When tech goes, the Nasdaq goes, and when the Nasdaq goes, the S&P goes.
Third, diplomacy. Every hint of a deal – the ceasefire announcement, Trump saying the war was “close to over,” reports of a ceasefire extension – sent markets higher. Investors are front-running the peace deal. They’re buying now in anticipation of the oil price drop and inflation relief a deal would bring.
Fourth, the market has learned. After Liberation Day tariffs last year, after Covid, after every geopolitical shock of the last decade – markets have recovered. Investors have been trained to buy the dip in geopolitical crises because historically it works. That playbook is running again now.
Why Some Investors Are Nervous
Not everyone is celebrating. Some serious voices are warning the rally has gone too far too fast.
The Strait of Hormuz reportedly closed again over the weekend after ships came under fire. The two-week ceasefire expires this week. Futures are lower this morning. Ken Griffin’s recession warning hasn’t gone away – the clock he described is still running.
One strategist called it a “Road Runner moment” – where the character runs off a cliff and keeps going because they haven’t looked down yet. Markets are running on hope. If that hope doesn’t materialise into a real deal this week, the ground disappears.
What This Means For You
If you’re a long-term investor, the S&P 500 hitting 7,000 during a war is actually reassuring. It confirms what history shows repeatedly – markets recover from geopolitical events, and selling during the panic is almost always the wrong move.
If you’re a short-term trader, the next few days are critical. The ceasefire expires this week. If it’s extended or a new deal is announced, markets likely push higher. If it collapses, the air comes out of this rally quickly.
Watch the Strait. Watch Islamabad. Watch oil.
The market has priced in peace. Now peace actually needs to happen.
