Despite the Iran war, stock prices hit record highs. The reason is as follows

U.S. stocks rose to record highs on Thursday and continued to rise on Friday on economic forecasts warning of slower growth due to war, oil supply shocks and prolonged conflict.

Many investors may be thinking:

Economists and market analysts say that’s largely because the stock market is a barometer of what investors think will happen in the future, rather than current valuations.

Investors are essentially ignoring the Middle East conflict as a temporary event that will be resolved relatively quickly, he said.

“The stock market is not trying to evaluate what’s going on today,” said Joe Seidle, senior market economist at JPMorgan Private Bank. “The stock market is always trying to predict what the world will be like six to 12 months from now.”

of S&P500The U.S. stock market index fell about 8% in the first weeks of the Iran war, from the start of the conflict on February 28 to its recent low on March 30.

However, stock prices have since recovered, erasing all losses since the start of the war. The S&P 500 closed at an all-time high on Thursday, about 11% above its low at the end of March. This followed Wednesday’s record closing price.

“Markets have been very resilient in the face of war and have rebounded strongly from the prospect of a resolution to the war,” said Mark Zandi, chief economist at Moody’s.

After all, economists say, the stock market signals a collective belief that tensions will gradually ease, the war will soon end, and oil flows through the Strait of Hormuz will normalize.

Economists say that’s largely due to investors being conditioned to believe that President Donald Trump will pull out if the economic pain becomes too severe, or so-called “TACO” trades, short for “Trump always chickens out.”

“Investors strongly believe, and have been conditioned to believe, that he will resign, find a way to pivot, declare victory and move on,” Zandi said.

President Trump framed his brinkmanship as a smart negotiating tactic and pushed aside the idea of ​​withdrawal.

Economists point to April 2025, the so-called Emancipation Day, when the Trump administration imposed a slew of tariffs on U.S. trading partners as a recent example of this move.

Within days, as the stock market plummeted more than 12%, President Trump announced he would suspend these tariffs for 90 days. Since then, stock prices have shown the largest increase in history, day after day, in response to Mr. Trump’s reversal.

Investors remember that President Trump often cushions geopolitical shocks — which is why they focus on positive headlines that suggest progress in peace talks, for example, Seidl said.

“The market has a memory,” Seidl said.

Economists say there are other factors contributing to the market’s resilience during wartime.

One of them, Zandi said, is investor enthusiasm for artificial intelligence and technology stocks, which account for nearly half of the S&P 500’s market capitalization.

“These stocks are driven by their own drivers, unrelated to the Iran war or anything else,” Zandi said. “I think we would have been much more depressed and had a much harder time recovering if we hadn’t had such great optimism about AI.”

We’re in the middle of a “tech boom,” Seidl said, and investors will remain optimistic until they think the technology cycle has come full circle.

More broadly, equity investors are essentially betting on a company’s future earnings growth, and the earnings backdrop is “pretty solid,” Seidl said.

For example, economists said consumer spending appears to be stable. Zandi said businesses are also seeing higher after-tax profits from Republicans’ so-called “big and beautiful bill,” which, among other things, makes it easier to pay for investments upfront and reduces tax liability.

But experts said there would be economic damage from the Iran war.

“Despite recent news of a temporary ceasefire, some damage has already been done and downside risks remain elevated,” Pierre-Olivier Grinchat, head of research at the International Monetary Fund, said on Tuesday.

Prolonged conflict risks deepening global economic pain, he wrote.

Even if the conflict is short-lived, as most markets expect, stocks are unlikely to rise significantly until it becomes clear that the U.S. is on the other side of the war and its economic impact, Zandi said.

Zandi said if investors are wrong and President Trump doesn’t withdraw or get the U.S. out of the war quickly, the stock market could face a “full-blown correction” or worse. A stock market correction is a decline of at least 10% from recent highs.

“Everyone thinks they know what a script is,” Zandi said. “All you have to do is follow the script. If you don’t, the market will be in big trouble.”

Experts say this uncertainty provides another example of why the average long-term investor should stick to their investment plans and ignore the noise.

“For the average investor, timing the market is very difficult, if not impossible,” Seidl said. “It’s better to take a long-term view and ride out bouts of volatility.”