Despite a U-turn in the Middle East peace process that saw both sides again engage in military escalation that led to a more than 4% rise in oil prices, the equity markets held up fairly well last week. True, the Dow Jones Industrial Average gave back some of its recent gains, the S&P 500 Equal Weight index was in the red and the Russell 3000 Value index edged down 0.07%, but the S&P 500 rallied more than 1% and the Russell 3000 Growth index rebounded 2.07%, cutting its deficit on a total return basis with Value since last Halloween to 19.2 percentage points (1,920 basis points).
No doubt, the twist and turns in the Middle East Conflict will impact stocks, with the weekend seeing Iran’s Supreme Leader vowing vengeance, “It is our certain and undeniable duty that this revenge be carried out,” and President Trump proclaiming, “1000 missiles are locked and loaded” if Iran acted on a threat to kill the U.S. leader.
We do not want to downplay the hostilities, but we offer our usual reminder that trouble in this part of the world has been constant. Indeed, the U.S. has been involved in active combat operations in the Middle East more or less since the first Gulf War started in August 1990, when the Dow Jones Industrial Average was below 3000, yet that venerable market gauge today stands above the 52000 mark and very close to its all-time high.
Certainly, the ride from 3000 to 52000 has not been smooth, with numerous trips south along the way as downside volatility remains the price of success for those who have profited from the far-more-lucrative and equally frequent trips northward.
The long-term trend in stock prices has been higher with equities overcoming all sorts of disconcerting headlines in the fullness of time,…
…because corporate profits, which are measured in actual and not-inflation-adjusted dollars, have grown over time,…
…because the U.S. economy on both a real (inflation-adjusted) and a nominal (actual dollars) has grown over time.
And earnings are projected to grow handsomely this year and next, with the latest EPS estimates for the S&P 500 from data provider Bloomberg for 2026 and 2027 standing at $343.81 and $399.54, up from $267.67 in 2025.
Certainly, those arguably rich estimates are based on the expectation that the U.S. and global economy will continue to show decent growth, which was the latest forecast from the International Monetary Fund, with Petya Koeva Brooks, Deputy Director, Research Department, writing last week:
The global outlook is being shaped by two powerful forces pulling in opposite directions: the lingering effects of the energy shock from the war in the Middle East, and a technology-driven investment boom. The net effect varies significantly across countries, depending on their exposure to the war and their position in the technology value chain.
We are projecting global growth of 3.0 percent in 2026 and 3.4 percent in 2027 — broadly unchanged from April on a cumulative basis. In effect, we expect a V-shaped recovery: weaker growth this year relative to our pre-war forecast, followed by a rebound next year.
On inflation, the picture is less encouraging. Global headline inflation has been revised up to 4.7 percent this year, while our core inflation forecast is broadly unchanged. Put simply, the disinflation trend that has been in place since early 2024 has stalled.
Nevertheless, the world economy has weathered the shock from the war better than feared, with limited evidence of second-round effects. A larger spike in oil prices was avoided thanks to inventory drawdowns, expanded production outside the Gulf, and actions to help soften oil demand. A steady rise in the renewable energy share, combined with lower energy intensity than just a few years ago, has also made many economies more resilient. And while financial conditions tightened sharply in early April, they have since eased and remain supportive by historical standards.
