Higher oil prices, higher yields, no more rate cuts? No problem for US stocks

• Oil prices jumped 40% since the war began, with front-month crude at $95/barrel but December futures at $77, suggesting markets expect near-term disruption to fade
• Rate cut expectations collapsed from two quarter-point cuts to just 6 basis points of easing priced in by December, while 10-year Treasury yields rose from 3.96% to 4.3%
• S&P 500 earnings estimates improved to 19% growth in 2026 from 15% pre-war, making stocks appear more attractive despite the P/E ratio of 20.4 being down from over 23 in October

Summary

Market Performance: The S&P 500 has fully recovered losses since a Middle East conflict began on February 27, 2026, closing up 0.1% since the war's onset and trading just 1% below its all-time high. The index had previously dropped nearly 9% from its late-January peak before rebounding.

Key Market Shifts Since Late February:

• Oil prices surged approximately 40% (front-month U.S. crude at $95/barrel)
• 10-year Treasury yields rose to 4.3% from 3.96%
• Fed rate cut expectations collapsed to just 6 basis points by December (less than one cut) from roughly two quarter-point cuts previously anticipated
• March inflation showed the largest monthly increase in nearly four years

Market Dynamics: Investors are demonstrating optimism based on two primary factors:

1. Temporary War Impact: Markets expect the conflict to resolve quickly, evidenced by December oil futures trading at $77/barrel versus $95 currently, suggesting anticipated normalization.

1. Strong Earnings Growth: S&P 500 earnings estimates improved to 19% growth for 2026, up from 15% before the war. The forward P/E ratio has declined to 20.4 from over 23 in October, making valuations more attractive.

Concerns: Several analysts, including Brad Conger of Hirtle Callaghan and Peter Tuz of Chase Investment Counsel, warn of excessive complacency. They caution that if higher oil prices, inflation, and interest rates persist beyond the near-term, current stock valuations may be unjustified.

Outlook: First-quarter earnings reports will test whether elevated profit expectations are realistic amid rising costs and inflation pressures.