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A Remarkable Rebound
The recent market recovery has been nothing short of extraordinary. When war broke out between the United States and Iran, the Dow and S&P 500 dropped roughly 7.5%, and the VIX — Wall Street's fear gauge — spiked to between 30 and 35. While that sounds significant in isolation, context matters enormously. Just a year earlier, during the tariff escalation of 2025, markets fell 20% and the VIX reached a historic 60. The market, in other words, was keeping this crisis in perspective from the very beginning.
Several factors contributed to that measured response. First, political leadership signaled the conflict would be short-term. Second, history provided a template: oil supply shocks stemming from geopolitical crises — Kuwait in 1990, Iraq in 2003, the Ukraine war in 2022 — tend to resolve within a roughly six-month timeframe. Third, and critically, the Federal Reserve stepped in with reassuring language, signaling there would be no immediate need to raise interest rates and that it intended to "look through" the oil shock rather than tighten policy in response.
Once ceasefire discussions entered the picture, the rally accelerated. From March 30th to mid-April, the S&P 500 surged 9.5%, and the Dow posted its seventh-largest point gain in history.
The VIX and the Question of Complacency
With the VIX now sitting near 18, a natural question arises: is the market becoming complacent? The pullback in volatility reads more like a collective sigh of relief than a declaration that the coast is clear. The conflict has subsided but not ended. A naval blockade remains in place — a measure that, under the rules of war, constitutes an act of war itself. Trade routes need to reopen, and goods and oil need to start flowing freely again.
The situation is tenuous. As one observer aptly put it, we are "one tweet away from greatness or terribleness." Investors should temper optimism with the understanding that the geopolitical picture remains fluid and that the resolution everyone is pricing in has not yet been finalized.
Oil: Down but Not Out
Oil prices tell a more cautious story than equities. Crude started the conflict at around $67 per barrel, spiked to $117, and has since settled near $92. While the direction is encouraging, prices remain well above pre-war levels, and history shows that oil prices are notoriously sticky on the way down. Elevated energy costs will continue to feed into headline inflation figures for CPI and PPI, complicating the broader economic picture even as the acute crisis fades.
The Fundamental Case for Optimism
Beneath the geopolitical uncertainty, the economic data paints a surprisingly constructive picture. Core PPI recently came in at 3.8% against expectations of 4.1%. Core CPI printed at 2.6% versus a 2.7% forecast. Unemployment sits at a solid 4.3%, and jobs numbers recovered sharply, rising to 178,000 from a negative 133,000 in the prior period. These are not the numbers of an economy in distress.
The real catalyst, however, is corporate earnings. Analysts are projecting double-digit earnings growth in the range of 12 to 13% for the current quarter. If realized, it would mark six consecutive quarters of double-digit growth — a streak not seen since 2011. History offers further encouragement: out of the last 40 quarters, actual earnings have beaten estimates 37 times. Early reports from the banking sector — notably Bank of America and JP Morgan — have already delivered strong results with positive forward guidance.
Where the Opportunities Are
Several areas of the market stand out. Big tech remains hard to bet against, having outperformed every other sector over the past decade and continuing to pour hundreds of billions of dollars into AI and infrastructure buildouts. The disruptive impact of artificial intelligence on the software landscape in particular has been immense.
Beyond tech, some surprises have emerged. Emerging markets are up roughly 10.5% year to date, developed international markets have returned around 7.5%, and infrastructure plays — a trade that gained momentum a year ago — are up approximately 10.5%. Large cap value and the Russell index are showing gains of about 6%, while growth stocks remain slightly negative. This broadening of market leadership suggests the rally is more durable than one driven by a single sector.
The Blockade: The Key Variable
All of this optimism comes with a major caveat: the Strait of Hormuz needs to reopen. The ongoing naval blockade is the single most important variable in the market outlook. There is hope that the blockade itself is applying pressure on China and Russia to push Iran toward a negotiated deal. If a deal is struck and trade resumes, the bullish case becomes very strong.
Sentiment data supports this conditional optimism. The American Association of Individual Investors (AAII) bearish sentiment reading, which spiked to 51 just weeks ago, has already retreated to 43. The mood is shifting from fear toward cautious confidence.
Looking Ahead
The bull case for the remainder of the year rests on a convergence of factors: a de-escalating military conflict, strong corporate earnings momentum, solid economic data, and a Federal Reserve content to hold interest rates steady. Inflation remains above the Fed's 2% target and will tick higher as elevated energy costs work through the system, but the central bank has signaled a willingness to be patient — reminiscent of the soft-landing narrative that dominated market discussion in prior years.
The market's turnaround in the face of war has, paradoxically, strengthened the bullish thesis. It demonstrated that the underlying economy and corporate sector are resilient enough to absorb a significant geopolitical shock. If the final piece — a diplomatic resolution and reopened trade routes — falls into place, the setup for the rest of the year looks quite favorable. But investors would be wise to remember that "if" remains the operative word.