Stock markets the world over celebrated the end of the Iran War last week with many closing the week at all time highs: Large cap (S&P 500, Russell 1000), small cap (Russell 2000, S&P 600), NASDAQ, emerging markets, Asia ex-Japan, Latin America 40, Canada, Australia, Israel, Poland, Italy, Netherlands, Austria, Spain, Singapore, Taiwan and Brazil all closed at all time highs (based on their ETFs). The S&P 500 closed higher every day last week and is up 12 of the last 13 days. Crude oil, meanwhile, fell over 11% last week, closing at $85.57, down from $117 just 8 trading days ago. It is still up 27% from the  pre-war close but down 27% from the recent high. Happy days are here again?

Well maybe, maybe not. President Trump assured markets last week that the strait of Hormuz was open for all commercial ship traffic and Iran had “agreed to everything”, including giving up its stockpile of uranium. He went so far as to claim that there was a plan to send “our people” into Iran with “lots of excavators” to retrieve the uranium and bring it back to the US. Iran had also agreed not to pursue nuclear weapons for a period beyond 20 years and to stop backing all their proxy groups like Hamas and Hezbollah. There were rumors of $20 billion in cash changing hands but that was denied by the President. 

Those claims stood all the way to Saturday morning when Iran announced that the strait of Hormuz was not in fact open and that transit required permission from their military. Ships in the gulf are getting really good at U-turns. They also denied agreeing to give up their uranium and said that shipping it to the US was a “non-starter”. While they didn’t directly deny the claim about Hamas and Hezbollah, neither did they confirm it. The Iranians referred to President Trump’s statements as “big lies” and “maximalist demands”. 

So, did President Trump lie? Well, that may depend on the definition of “lie”. We don’t know what the President was trying to accomplish with his statements and it could be part of some negotiating strategy but if so, I’ll be damned if I can figure out what it is. The strait of Hormuz has allegedly been opening for 10 days now but the number of ships going through it can probably be counted on two hands (okay, you might need a few toes). The simple answer is that regardless of what either side has said or done, the strait is still closed and the oil, fertilizer and other commodities stuck in the gulf are still stuck.

None of this, by the way, is exactly a secret. There are some ships getting through sporadically but the traffic is easily tracked (see here and here) and it’s a fraction of what it was pre-war. And the idea that the Iranians would give up their uranium after resisting all this time, in exchange for, well, nothing, is fanciful. Stop backing Hamas and Hezbollah? When they’ve conditioned opening the strait on Israel stopping their attacks on same in Lebanon? Again, not exactly rocket science to figure out that was unlikely. So my question then is, why did markets move as they did last week? Why did oil drop almost 10% Friday? Why did stocks make new all time highs?

Markets are said to anticipate but that is only true when they’re right. Markets are not precognizant. They don’t actually divine the future but instead reflect the consensus opinion – which may or may not be right. These markets are, after all, a reflection of the people who trade them, those very emotional, fallible humans. Is that still true? Are markets really a reflection of the decisions made by millions of individuals? Well, that is an interesting question isn’t it? What role does AI play in markets today? And if AI is being used to trade, do all AI systems come to the same conclusions? Or are they different enough that two AI programs could observe the same press releases, off hand Presidential comments, market movements and other inputs and come to different conclusions about the future direction of the global economy and markets? Here’s another question: if AI is prone to hallucinations – and I can attest first hand that it is – then what role would those hallucinations play in markets? All good questions with not very good answers right now.

Is the stock market responding to Iran War developments or something else? It seem obvious that the war is impacting stocks since they rally when there is “good’ news about the war and fall when there is “bad” news but a lot of the initial moves get reversed pretty quickly. In the short term, markets are moved by the emotional response to “news” but over the longer term stock prices are a function of earnings growth, dividends and interest rates. The Iran War should only affect stocks to the degree it affects those variables. It would seem, given movements in interest rates and stock prices, that the impact of the war has been pretty minimal to date. Interest rates (10 year Treasury rate) are up 28 basis points since the start of the war and are trading in line with where they were at the beginning of February. That just isn’t enough to affect stock prices much.

Q1 earnings have been good so far but only 10% of companies have reported. Those 10% have been good though, with 88% of them reporting earnings better than expected. A surprising addendum is that those companies have, on average seen their stock prices fall over the period two days before to two days after they report. That is highly unusual; most companies that report better than expected earnings see their stock prices rise. What does it mean? Well, it’s too early to make a general market observation but for those companies at least, I’d say that good, even great, earnings were already priced in. A stock that doesn’t rise on good news is one where supply has met demand.  

AI certainly gets some credit for where the market is today but I don’t think that tells the whole story. There is little doubt that AI hype is getting out of hand and I would point to the story of Allbirds last week as definitive evidence. This former sneaker company, that once sported a market cap of $4 billion, sold its sneaker brand for $39 million – yes that “m” is right – in March. Last week it announced that it was raising $50 million through a private placement of debt to fund their transition to “…(A) fully integrated GPU-as-a-Service (GPUaaS) and AI-native cloud solutions provider”. The stock was up over 700% at one point the day of the announcement, but in what passes for sanity these days, ended the week up a mere 350%. So, they’re going to compete in the “GPU-as-a-Service (GPUaaS) and AI-native cloud solutions provider” market on $50 million? A company that was formed as a public benefit corporation, dedicated to environmental conservation and made sneakers out of wool and eucalyptus fiber is dropping the public benefit moniker so they can pursue a business that is the antithesis of their original mission? I’m guessing the smell of patchouli has dissipated in the NewBird AI office. But microcap stocks aren’t moving the S&P 500.

The Magnificent 7 stocks have performed well in this recovery too but if we’re talking about fundamentals, then the market’s resilience isn’t really about them either. As I said above, Q1 earnings for S&P 500 companies so far are coming in better than expected (up about 13%). And full year earnings are expected to rise 18%, about as good as you’re going to see outside of a recession recovery. But the magnificent 7 isn’t so magnificent when it comes to earnings expectations. The Mag 7 have been growing faster than the other 493 companies in the index* and that is expected to continue in this quarter and for the full year. But that is due to one company – Nvidia. Earnings for the not quite so magnificent 6 are expected to rise only 6.4% in Q1 while the other 493 companies’ earning are expected to rise 10.1%. For CY 2026, the mediocre 6 are expected to report earnings gains of 13.2% while the forgotten 493 are expected to report a rise of 15.9%. Furthermore, S&P 400 (midcap) and S&P 600 (small cap) earnings are expected to rise 14.5% and 15.5% respectively in Q1 and 17% and 19% respectively for CY 2026. Stock market performance is no longer just about a few big companies.

If you were only paying attention to the things that matter for stock prices – earnings growth, dividend yields and interest rates – the bullish stance of the market makes perfect sense. It is only when you start reading the news that the bears are able to get their claws in you. John Bogle’s simple model for the stock market was that returns would approximate earnings growth + dividend yield + valuation change (driven primarily by interest rates). Doing that today gets you 18% earnings growth + 1.4% dividend yield (and said dividends are expected to grow 6.5% this year) + valuation change. If interest rates are fairly stable – and they have been for the last 3 years – and valuations don’t change we’re looking at nearly 20% gains.

There are only so many things we can do to improve our investment returns. Keep costs under control and limit trading are two well known ways of doing so. Another one, that is related to the mandate to limit trading, is to limit how often you check the balance of your account. That comes from a study by Shlomo Benartzi and Richard Thaler called “Myopic Loss Aversion and The Equity Premium Puzzle“.

The idea is simple. On any given day the odds of the stock market being up or down is approximately 50% (the actual figure is 53% up) so if you look at your account every day, you’re going to see a loss about half the time. If you look once a year the odds you’ll see a gain improve to about 75% and if you check once a decade you’ll see a gain about 95% of the time. Since investors react more strongly to losses than gains, checking less frequently lowers the chance that you’ll panic sell. There is another “study”, that may be apocryphal, by Fidelity that found that the best performing accounts at the firm were those that were frozen due to probate and couldn’t trade or were held by investors who lost their log-in credentials or just stopped checking their accounts for some other reason.

So, to our list of things that are likely to improve your results, we can add, stop checking your account balance. And for goodness sake, stop reading the news**.

Joseph Calhoun

 

*I know some smarty pants is going to tell me that there are 503 stocks in the S&P 500. They are right but there are only 500 companies in the index. Google, Fox and News Corp. each have 2 classes of stock in the index for a total of 503 stocks

**I don’t mean this literally. There are good reasons to be informed about the world. But with all the sources of mis and dis information these days you need to be very careful about translating “news” into portfolio actions.