Markets finally caught a break last week, snapping a five-week losing streak as investors leaned into hopes that tensions in the Middle East may begin to ease. The S&P 500 rose 3.36% while the Dow gained 2.96%, and the Nasdaq, up 4.44%, delivered its strongest weekly performance since November. The rebound was driven less by hard resolution and more by shifting expectations. Signals early in the week suggested a potential wind-down in U.S. involvement in Iran, even though concrete exit plans continue to elude us.
Optimism, however, proved fragile once again. President Trump’s Wednesday prime-time press conference turned into a meeting that should have been an email, since little new information was shared. Despite this, markets showed resilience and recovered by the end of the week, despite crude hovering near $110 per barrel.
Treasury yields moved lower, with the 10-year falling from 4.44% to around 4.31%, helped in part by some Federal Reserve commentary that eased near-term inflation fears.
Underneath the headlines, investors are showing signs they are willing to look through geopolitical noise, but only if they believe the disruption will be temporary. Right now, that belief is holding on, but just barely.
Not your typical duration risk
The key question driving markets is not whether oil prices have spiked (they sure have), but how long they stay elevated. Two distinct paths are emerging, and the gap between them is wide.
If the disruption in the Strait of Hormuz stretches into a multi-month event, the implications become far more serious. Sustained high oil prices would wreak havoc throughout the global economy, lifting costs across transportation, manufacturing, and food production.
People young enough not to remember, or old enough to forget, the chaos of the 1970s oil shock was catastrophic. In energy-importing regions like Europe and Asia, recessions, shortages, and violence are a near-certainty. The U.S. is heavily insulated from the worst of it, but we would still see growth slow as consumers feel the squeeze and businesses take more evasive action to protect their bottom lines.
The more constructive scenario, and the one markets appear to be pricing in, is a shorter disruption lasting a few more weeks. In this case, oil prices would gradually ease back toward the $70 to $80 range, inflation pressures would prove temporary, and global growth would remain intact. U.S. equities could continue grinding higher, supported by relatively strong domestic fundamentals.
The futures market is clearly leaning toward this second outcome, but the conflict is a true catch-22 as Jim Bianco highlights in his piece The New Rules of Warfare. Exiting soon would please the market but may have unforeseen consequences for global trade and long-term international conduct.
“If the US abandons the Gulf while Iran holds the Strait contested, markets will price this as validation that cheap systems can hold global trade hostage. The current market disruptions will become permanent.” – Jim Bianco
Investors are currently treating this as a shock, not a structural shift. But if Bianco is correct, the U.S. can’t leave until it’s clear that might makes right. As of this writing, the status of the missing U.S. service member raises the stakes and adds to the list of reasons that leaves the end of the conflict a true unknown. As President Trump made clear in his Wednesday address, this is one of the shorter conflicts we’ve engaged in, and that’s not encouraging.
Fundamentals quietly hold the line
While geopolitics dominated the headlines, the underlying economic data told a steadier story. Manufacturing activity came in stronger than expected, reinforcing the idea that the U.S. economy entered this period of uncertainty on a solid footing. ISM manufacturing remained in expansion territory for a third straight month, and consumer spending continues to show moderate resilience considering the years of frustration and poor sentiment.
The labor market added another layer of support. March payrolls came in more strongly than expected, and while monthly data has been shockingly volatile, the three-month trend suggests job growth is running modestly above the pace needed to keep unemployment stable. Wage growth remains in the mid-3% range, which should keep households stable as long as inflation doesn’t wander too high for too long.
That said, not all signals are flashing green. February job openings declined, hiring slowed, and long-term unemployment isn’t improving. The foundation might be intact, but it is not getting any stronger. For now, that will have to be enough.
FactSet put out its earnings preview, and the numbers look compelling:
What this means for investors and what’s next
The coming week will test whether optimism can hold in the face of ongoing uncertainty. Inflation data, including CPI and PCE, will be in focus, though it will be hard to treat it as anything but old news given the pace of change. More important will be any developments out of the Middle East and whether oil markets show signs of stabilizing.
For investors, the takeaway is straightforward. The base case still leans toward resilience, with the U.S. economy holding steady and markets recovering as long as the conflict can prove temporary. But the margin for error is thin, and sentiment will shift quickly if that assumption is challenged. Staying disciplined, rebalancing where needed, and avoiding reactionary decisions remains the most reliable playbook in an environment where headlines, not fundamentals, are driving short-term moves.
If you need a dose of optimism, Nick Colas and Jessica Rabe of DataTrek Research have some solid data on the win rate following situations like this.
Their conversation with Josh Brown has a lot of great, actionable nuggets: This Is Why You “Never Ever Ever” Sell Your Energy Stocks
Economic Reports
Earnings Releases
Related: Inflation Reversal Risk Grows as Oil Surge Reshapes Market Leadership