Why Wall Street is setting records even with the Iran war still going on

US Stock Market Defies Logic, Sets Records Despite Economic Concerns and Geopolitical Tensions

It seems counterintuitive. The U.S. stock market is reaching unprecedented heights despite expensive gasoline prices, wavering consumer confidence, and ongoing tensions with Iran. This apparent contradiction has left many investors questioning the market’s underlying strength.

The explanation, however, comes down to a fundamental principle that drives Wall Street: corporate profits. American companies are currently generating such robust earnings that investors are willing to pay premium prices for ownership stakes, pushing major indices to record levels.

For many investors, the journey has been anything but smooth. Just last month, the S&P 500 plunged nearly 10% from its previous high, triggering anxiety and selling pressure. Yet true to historical patterns, the index—which forms the backbone of many retirement accounts—has rebounded impressively. On Wednesday, it closed at an all-time high of 7,137.90, rewarding those who maintained their positions through the volatility.

Stock prices fluctuate constantly due to countless factors, but over extended periods, valuations primarily depend on two elements: a company’s earnings and how much investors are willing to pay for each dollar of those profits.

The latter component typically oscillates with interest rates and investor sentiment. When fears about the Iran conflict initially intensified, stock prices plummeted as investors worried that prolonged oil price increases might trigger devastating inflation throughout the global economy. Rising interest rates further pressured equities, as market participants feared that inflation concerns would prevent the Federal Reserve and other central banks from implementing rate cuts.

Since late March, however, sentiment has shifted significantly. Markets have increasingly priced in the probability that the United States and Iran will avoid worst-case scenarios. Both nations have strong economic incentives to de-escalate, and Iranian leadership likely recognizes that ending hostilities would better ensure their survival. The recently negotiated ceasefire, though fragile, remains intact.

Oil markets reflect this evolving perspective. Brent crude, the international benchmark, surged from approximately $70 per barrel before the conflict to $119 at peak anxiety. Prices have since moderated to around $100, signaling reduced concerns about severe supply disruptions.

Much attention has centered on the Strait of Hormuz, a crucial channel for oil tankers exiting the Persian Gulf. A prolonged blockade would harm all parties involved—global consumers would face oil shortages while Iran would lose vital revenue from crude exports.

“By denying Iran its oil-related revenue, traders may be thinking that the economic war may be more effective in getting concessions from Iran’s regime than was the kinetic war only, and that this will end the war sooner, rather than later,” explains Thierry Wizman, a strategist at Macquarie Group.

Wall Street is also cautiously rekindling expectations for Federal Reserve interest rate cuts later this year. While these probabilities remain significantly lower than pre-conflict levels, investors no longer fear potential rate increases, according to CME Group data.

As anxiety has subsided, the market has refocused on corporate performance—which has been remarkably strong. With approximately 15% of S&P 500 companies having reported first-quarter results, the vast majority have exceeded analyst expectations. Major corporations from various sectors—including Citigroup, J.B. Hunt Transport Services, and UnitedHealth Group—have posted impressive numbers.

If remaining companies simply meet projected targets, S&P 500 earnings will show approximately 14% growth compared to last year, according to FactSet. These results incorporate a month of wartime conditions, yet companies report minimal impact on their bottom lines despite ongoing vigilance.

Bank of America CEO Brian Moynihan noted last week that “we saw healthy client activity, including solid consumer spending and stable asset quality, indicating a resilient American economy.” This persists even as surveys show U.S. households expressing anxiety about elevated gasoline prices and broader inflation concerns.

Analysts have actually raised profit expectations for S&P 500 companies since the conflict began, forecasting accelerated growth of 20% in the second quarter. Companies’ guidance has generally supported these optimistic projections.

Delta Air Lines recently reported strong demand across both business and leisure travel segments. PepsiCo maintained its pre-conflict profit forecast, with CEO Ramon Laguarta highlighting the impressive resilience of international operations. GE Vernova increased its revenue projections for the year, citing surging demand for power from AI data centers.

Despite the current optimism, market conditions remain susceptible to rapid shifts. If U.S.-Iran negotiations deteriorate and oil supply constraints intensify, investor sentiment could quickly reverse. Persistently high oil prices would eventually erode corporate profits by increasing operational costs while simultaneously reducing consumer spending power, creating a potential double blow to the market’s current strength.