“The Market Has Declared Victory”: S&P Rebounds 10%, Nasdaq Achieves Ten-Day Rally; U.S. Stocks “No Longer Care” About Hormuz

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More than a month after the outbreak of the Middle East conflict, the U.S. stock market has rebounded.

Over the past period, Wall Street has been selectively “filtering out the noise.” The S&P 500 index has risen nearly 10% since March 27, while the Nasdaq 100 has gained about 12% over the same period, marking its 10th consecutive day of gains—the longest winning streak for the index since 2021.

More crucially, the S&P 500 has completely erased all its losses since the Iran war in Monday’s trading session.

“The سوق Has Declared Victory”

Rich Privorotky, head of Goldman Sachs’ Delta One trading desk, pointed out: “The market seems to have declared itself victorious in the ‘war’ with Iran, even though the conflict itself hasn’t truly ended.”

While some believe Iran is merely biding its time, Privorotky expressed surprise at Iran’s current response: “The Houthis have not escalated actions in the Red Sea region, drone attacks have not increased, and the ceasefire agreement has not been broken.” He believes it may be premature to declare victory now, but the stock market clearly thinks the situation has stabilized.

Goldman Sachs strategist Chris Hussey stated bluntly: “It has been over a month since the Iran war began, and incredibly, the S&P 500 is up 1.6% year-to-date, which was unthinkable just last week. Despite multiple ups and downs on the path to eventual peace, stocks are forward-looking instruments, and as we wrote before, the market cannot afford to wait for a problem they know will eventually be resolved—this dynamic explains today’s market behavior and the reason for the renewed outperformance.”

The market’s logic is shifting. Doug Peta, Chief U.S. Investment Strategist at BCA Research, said: “The stock market, and indeed the entire financial market, seems to care less about the situation in the Strait of Hormuz.”

In the overnight market, “leading” companies in the artificial intelligence sector are also emerging. The Magnificent 7 continued their strong performance, rising 3%, with a cumulative gain of 15% over the past 10 trading days (up in 9 out of 10 days).

The chip sector is a key driver of this rebound. Bloomberg data shows that earnings expectations for the chip sector jumped about 10% over three trading days, significantly boosting the overall EPS forecast for the S&P 500. Goldman Sachs data indicates that Nvidia and Micron are expected to contribute over 50% of the S&P 500’s EPS growth this quarter.

And this rebound is not just a stock story.

U.S. Treasury yields fell alongside declining oil prices, dropping by about 3 to 4 basis points across the curve. Bitcoin broke through $76,000, hitting a new high since the conflict began. Gold traded above $4,800, its highest since March 18. The U.S. dollar continued to weaken, nearly erasing all its gains since the war began.

Market liquidity is also returning to normal. Goldman Sachs data shows that the top-of-book liquidity for S&P 500 component stocks has recovered from about $3.5 million at the peak of geopolitical uncertainty to $13.16 million, a 141% increase above the 20-day average. The proportion of ETF trading volume to total market volume has also retreated from a peak of about 50% to 29%.

An interesting phenomenon is that Trump’s “familiar playbook” seems to be playing out again…

Funds “Chasing the Rally One-Way,” Shorts Forced to Cover

Regarding this strong rebound in U.S. stocks, a veteran stock trader said: “The flow of funds is one-way… CTAs, clients, everyone was underweight risk exposure, and now they’re all chasing the rally.”

Behind this “panic buying” is the convergence of multiple forces:

Institutional investors are leading the rebound. Mark Hackett, Chief Market Strategist at Nationwide, pointed out that after the massive sell-off, institutional attention has refocused on fundamentals, and the fundamental data is supportive.

CTA funds are buying heavily, but long-only funds and hedge funds are selling. According to Goldman Sachs trading desk data, long-only funds (LO) were slight net sellers, while hedge funds (HF) were net sellers to the tune of 3%, mainly reducing positions in Information Technology, Industrials, and Communication Services sectors—they are “handing over” to the buying from CTAs.

Short covering is accelerating. Goldman Sachs’ rolling short basket saw three significant surges, unprofitable tech stocks rallied sharply, and the most shorted stocks faced a short squeeze.

Goldman Sachs’ trading desk attributes the continued strength of the “Magnificent Seven” (Mag 7) to four factors: improved geopolitical backdrop driving index hedge position covering (Mag 7 accounts for about 33% of S&P 500 weight), the tapering of fund rotation trades since Q1, market positioning ahead of strong earnings season expectations, and ongoing stock buyback program support.

Earnings Season Takes Over, Fundamentals Repriced

The shift in market narrative is supported by data.

This week, major financial institutions like JPMorgan Chase, Citigroup, Wells Fargo, and BlackRock are reporting their first-quarter earnings. Goldman Sachs’ Chris Hussey noted that the banking sector is often seen as a barometer for the overall health of the U.S. economy. “This morning’s earnings reports show that despite concerns about inflation, AI, private credit, and consumer spending, households and businesses remain in solid shape.”

Inflation data also provided support. March PPI rose 0.5% month-over-month, lower than expected. But Blake Gwinn, interest rate strategist at RBC Capital Markets, cautioned, “The market is increasingly interpreting PPI data through the lens of PCE pass-through,” and tends to “view weak data as lagging indicators, believing inflationary pressures are still on the way.”

Stocks “Look Forward,” Oil Market Still Waiting

It’s worth noting that a clear divergence has emerged between the stock and oil markets.

WTI crude oil futures fell below the $91 mark during the day. Polymarket data shows the probability of WTI falling below $90 by month-end is rapidly increasing. The direct triggers for the oil price drop are reports that Iran is considering suspending some oil exports to push for negotiations, and that the U.S. and Iran are discussing a second round of peace talks.

Market data—the crude oil forward curve (represented by December Brent futures)—shows the oil market believes resolving supply disruptions will take longer, contrasting with the stock market’s “mission accomplished” optimism.

Goldman Sachs’ Chris Hussey explained: “Stocks are forward-looking instruments, and the market cannot afford to wait for a problem they know will eventually be resolved—this dynamic explains today’s market behavior and the reason for the renewed outperformance.”

Risks Remain After the Rebound

Despite the significant improvement in market sentiment, several strategists remain cautious about the outlook.

Lori Calvasina of RBC Capital Markets warned that the uncertainty of the war and its ripple effects still keep the risk of a “growth scare pullback” elevated. She wrote in a client note on Sunday: “If the fundamental narrative around the war or its impact changes, from a valuation perspective, there is still room for the stock market to fall again, potentially even deeper than before.”

Nationwide’s Hackett is skeptical about the S&P 500’s ability to break through to new all-time highs: “I doubt we can truly break through to new highs before substantial progress is made in peace talks. But once that day comes, conservative positioning, strong fundamentals, and reset expectations will form a long-compressed spring force.”

Bond investors also remain skeptical about the improving inflation news. Raghav Datla, global markets interest rate strategist at Citigroup, said: “It will be difficult to see lower inflation numbers in future reports, and no one can accurately predict what the numbers will be.”

Veteran strategist Ed Yardeni is more optimistic. In his investor note on Sunday, he stated that, similar to the Russia-Ukraine conflict, financial markets are learning to live with the Iran war, and he maintains his view that the S&P 500 bottomed on March 30.

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