The stock market is not ignoring Iran. It is rising because of these three real reasons

The US-Iran war continues with no sign of a peace deal. Someone needs to tell the stock market.

After a modest decline at the start of the war, the S&P 500 has rebounded to record highs, closing above 7,400 on Monday for the first time as oil prices remain at record highs.

Some say that the stock market is ignoring the impact of the coming war, fueled by speculative activity. But it is more than that.

There are real underlying reasons for the comeback, including an economy less dependent on oil for power, tighter corporate margins with energy costs like smaller inputs and technology companies whose businesses have been stymied by the impact that powers the S&P 500’s forward earnings.

The index has made short work of its recovery from its lows in March, as it has rebounded by nearly 17% from around 6,300 in more than a month.

When the US started hitting Tehran on Feb. 28, the S&P 500 was down only about 8%. In other words, it did not even fall into a correction – defined as a fall greater than 10% and less than 20% – that would obviously follow a shock of power to shake the world economy.

At its peak, since the conflict began, oil rose above $120 a barrel, and has stayed above $100. Gas prices have risen above $4.50 a gallon at the pump, and are above $5 in many states.

Many investors have increased the stability of the market to the long term, which means the hope that companies can face the disruption of supply from the blockade of the Strait of Hormuz as long as it is temporary, and not so severe.

But with stocks rallying even with the US-Iran conflict in its third month, it’s time to look for more positive explanations.

Here are some of them:

Low corporate impact

Even if the Strait of Hormuz reopens tomorrow, the damage has already been done. Experts in the field expect it will take weeks for ships from the oil corridor to reach destinations in North America, Europe or East Asia. And even if they do, high oil prices are not expected to return to pre-crisis levels, meaning businesses and consumers around the world will be facing significant price pressures for some time.

But when it comes to the US market, most companies will be largely unaffected by the change, at least according to their latest earnings calls. Trivariate Research’s review of 1,465 financial documents since early March found that only 10% of the entire US stock market expects a negative or mixed impact from the US-Iran war. The company said that 10% estimate is, if anything, an overestimate.

For investors, that means the S&P 500 can continue to perform well, even if certain parts of the market suffer. Trivariate Research closely monitors the consumer choice sector, where many companies have already come out publicly about the impact the war is having on consumers. Those companies that have posted multiple contract years so far are names to avoid, such as certain software companies, the company said.

The amazing benefits of technology

The latest earnings season has reaffirmed the importance of another pillar of the bull market: artificial intelligence.

Indeed, the largest companies in the S&P 500 are now larger than ever from an earnings perspective. Apollo’s chief economist, Torsten Slok, pointed out that the 10 largest companies in the S&P 500 now account for about 34% of the index’s total profits, doubling from 17% in 1996. 40%, to levels not seen since 2014.

Of course, that great concentration makes investors aware of the dangers of relying on just a few names. But the rush of profits during the first quarter reporting period from the technology giants, with the rapidly growing use cases of AI, and the cost of capital in the balloon, convinced investors that the focus on the markets is a feature, not a bug, and that the underlying story in AI is complete.

Fuel independence

There is also the fact that the US economy is less dependent on oil than it was during past crises. Antonio Gabriel, global economist at Bank of America Securities, said last month that the US needs about a third of the oil it needed back in the 1970s to produce the same amount of GDP.

Even if the war in Iran escalates, any 10 percent oil price shock will have a 20 percent impact on the currency today, compared to the 0.90 percent impact it had in the 1970s, Gabriel noted.

“A repeat of the 1970s seems unlikely,” Gabriel wrote.