After falling to multi-month lows in late March, the US stock market has been on a relentless rally.
While oil traders nervously awaited the outcome of the Iranian crisis, stock investors seem to have had enough. Business Insider identified three reasons for the powerful recovery in the underlying markets.
Reason #1: The Market Is Pricing Peace, Not War
The main reason is simple: despite ongoing geopolitical uncertainty and threats of further strikes, investors are already pricing in a quick peace agreement.
Wall Street has demonstrated a willingness to ignore short-term war rhetoric and focus on more positive long-term catalysts—primarily future corporate profit growth, which has historically been the main driver of stock market returns. Reason #2: Aggressive Earnings Outlook Revisions
The rebound in US stocks is being actively fueled by massive earnings forecast revisions from investment banks. In recent days, analysts at giants like Deutsche Bank and Barclays have been massively raising their earnings estimates for US corporations.
Reason #3: Attractive Big Tech Valuations
The rapid rise in earnings expectations has acted as a powerful shock absorber for valuation multiples. A basic market rule states that when earnings forecasts rise faster than stock prices, the forward price-to-earnings ratio of the entire index declines, making stocks cheaper to buy.
The war itself also contributed to this phenomenon. The March sell-off in stocks, triggered by the Iranian crisis, provided a much-needed "reset" of overheated valuations across the market. Looking at the forward P/E chart for the Nasdaq 100 index, you'll notice a curious anomaly: although the March decline was colossal by historical standards, the ratio hasn't returned to its peaks following the stock price recovery. This clearly indicates that the tech sector is still quite attractively valued.
Iranian geopolitics aside, the main test of this bullish model will come in the last week of April. That's when the market's major heavyweights—Alphabet, Microsoft, MetaTrader*, and Apple—will publish their quarterly earnings reports over the course of two days.