While oil traders stay suspended in limbo over the Iran war, stock traders seem to have called it a day.
Since dropping to a multi-month low in late March, US equities have accomplished the following feats, through Tuesday’s close:
The primary reason is straightforward: Even as Iran-war uncertainty persists, investors are pricing in a peace deal. They’ve proven willing to overlook near-term war rhetoric. That’s allowed them to focus on more positive catalysts, like future earnings growth, which has historically been the biggest source of returns.
The US stock rebound has also been driven by earnings forecasts getting more aggressive across Wall Street. Firms like Deutsche Bank and Barclays have raised estimates in recent days, while data from FactSet shows that there have been broad upward revisions by sell-side analysts.
The ratcheting-up of earnings expectations has secondarily served to help suppress stock valuations. As profit forecasts grow, the forward price-earnings (P/E) ratio for an index drops.
You know what else has helped it fall? The fact that the Iran war stock sell-off reset valuations across the market. Look no further than the chart below — which shows Bloomberg’s forward P/E ratio for the Nasdaq 100:
Sure, the drop is enormous in the context of history. But the ratio also hasn’t rallied back with stock prices, suggesting the sector remains attractively priced. That’s been a popular argument for a growing chorus of market pundits who are advising clients to get back into tech stocks, and fast.
Just last week — in what now looks like a prescient move — Goldman Sachs released a list of seven reasons why tech stocks were a screaming buy-the-dip opportunity. Valuations were also cited as a primary reason for piling back into tech for a handful of the interview subjects for our latest edition of “How to Invest $10,000” series.
From a non-Iran perspective, the next big test for the earnings-driven bull narrative will be the last week of April, when juggernauts Alphabet, Microsoft, Meta, and Apple report across a two-day period.
Investors will of course be watching to make sure newly raised profit forecasts are met. But there’s also the wild card of how they’ll treat capex spending on AI. If certain results don’t sit right with them, tech stocks could see a fresh wave of selling.
