Market participants on Wednesday expressed varying degrees of incredulity at the resilience on display in equities, which were largely undaunted by geopolitical tension these past two weeks.
I went on record warning against the temptation to assume the Israel-Iran war would manifest in risk aversion. Indeed, the last two Weekly letters cautioned readers that in the absence of a transmission channel from the conflict to corporate bottom lines, there was no reason to expect a dramatic stock selloff in connection with the conflict.
Further, I suggested repeatedly in recent days that Tehran’s options for responding to Israeli airstrikes were severely limited, where that meant lobbing missiles. It would take more than that, I intimated, to cause a meaningful run-up in crude. And a sharp spike in oil prices was the only real contagion risk for equities.
Below, find a few excerpts from the above-mentioned Weeklies for anyone who might’ve missed them:
What matters for stock prices is the outlook for profits, and unless there’s a reason to suspect that a given crisis — be it a war or a pandemic or a weather event or something else — will materially impact the bottom line, you shouldn’t expect a sustained down-trade.
It’s always possible [Iran] could resort to closing the Strait of Hormuz [but] it’s difficult to see a scenario where crude spikes to levels observed at the onset of the war in Ukraine. Brent would need to climb 74% to match the March 2022 high. Impossible? Nothing is. Implausible? Very much so.
I’m an incorrigible pessimist who generally believes the worst outcome’s probably the most likely outcome. Pollyanna doesn’t live here, I can assure you of that. But if you’re going to argue that equities should price in anything more than a token discount in connection with the Israel-Iran conflict, you have to be able to say why. If you can’t — or if you find yourself resorting to nebulous warnings about the odds of “World War III” having increased materially — you shouldn’t be surprised if markets don’t end up agreeing with you.
Now here we are, on June 25, with big-cap US tech perched at a new record high and crude sitting more or less where it was when Israel launched its opening salvo on June 13.
I realize all of the above sounds like a roundabout way of shouting “I told you so!” and in part it is. But the point I want to make is that while recent events in the Middle East are indeed unprecedented on many scores, we tend to overstate the case when it comes to our times being extraordinary.
In market commentary, that tendency leads us to habitually present exaggerated juxtapositions between our allegedly extraordinary times and “oblivious” risk assets which, were it not for [fill in the blank with your preferred excuse for being under-invested], would be trading much lower to reflect the onset of the apocalypse. Because if these aren’t the end times, then what are?!
Consider, for example, the following excerpt from a well-meaning Bloomberg piece published Wednesday:
Few times in history has the US market grappled with as many headwinds as it’s faced in 2025: A new president rejiggering the global order, sweeping tariffs and a bout of uncertainty stemming from conflict in the Middle East. Stocks have still prevailed against all odds and sit just a whisker away from all-time highs.
Is that true? I mean, the part about the tariffs and the wars is obviously true, but is it really accurate to say that almost never in history have US equities “grappled with as many headwinds” as they’re facing today, in 2025?
Let me answer my own question: No. While acknowledging there’s a subjective element to these sorts of assessments given the impossibility of quantifying the word “headwinds,” that assertion’s not true.
Take September of 2008, for example. I realize that was “a long time ago” for some readers, but to someone as “old” as I am, it doesn’t seem so distant. And I can assure you: US equities were “grappling” back then with “headwinds” that make today’s seem like a soft summer breeze.
And look: You don’t have to choose Lehman to make the point. The world’s a terrifying place. There’s always something scary going on. And the fact is, I can’t remember a single time going back decades when someone, somewhere wasn’t arguing that markets were mis-priced relative to the end of the world, which was supposedly imminent. In another incarnation — and, if I’m honest, in the earlier days of this one — I was that “someone, somewhere” juxtaposing every rally with everything wrong in the world.
I’m not suggesting stocks are a one-way ticket higher from here. I doubt we’ve seen the worst of it when it comes to the situation with Iran, and we still have three years (at least) of tariff drama to look forward to.
If Tehran’s nuclear program didn’t really suffer much of a setback from Donald Trump’s bombing runs, expect him to bomb them again at some point, particularly if they exhibit anything that looks or sounds like belligerence. The toothpaste is out of the tube now. Bombing Iran’s no longer taboo for the US. And expect Israel to break the ceasefire. The regime in Tehran’s still likely to fall, and if it does, it’ll be messy. Who knows, maybe they’ll even pop up waving a nuke held together by a rubber band a two paper clips.
As for Trump’s trade war, we all know it’ll trigger more bouts of volatility and probably a few more sharp drawdowns for equities. When that’ll be I have no idea. Neither does Trump. As he put it last week, “Nobody knows what I’m going to do.”
But be wary of bear narratives which lean too heavily on the notion that we’re “witnessing history.” I’ll quote from a recent Weekly letter again, if readers will forgive the vanity implied by someone who regularly quotes themselves.
“Every day’s ‘history,”‘ I wrote, on June 15. “And while it’s certainly true that some events are more consequential than others, the superlatives we employ to describe what’s going on in the here and now suggest we have very short memories. Or that we’re hard-wired for apocalypticism.”
Remember in 2020 how quickly the 30% drop in SPY, (dropped due to fears of potential economic fallout resulting from covid), recovered once the Federal government ramped up deficit spending and the Federal reserve dropped rates and started buying bonds…even though covid was spiraling out of control, death rates were dramatically up, the economy was shutting down and people were staying home and sheltering in place?
Throw in record stock buybacks and the fact that TINA is still alive.
Takeaway: stocks can overcome just about anything. Likely even Mamdani as mayor of NYC (glad I don’t live there anymore).
I see we’re comparing democratic socialism to plagues now. Be sure to send your social security checks back to the government and remember not to use any public goods or services. After all, socialism’s bad.
I don’t receive social security checks. But I understand your comment.
Not one in 100 well-to-do Americans would last a week in the shoes of the millions upon millions of people out there working two, three and four jobs just to survive. And we can’t even be graceful enough, as well-off lucky people, to accept the votes of the less fortunate without complaining that a rich person might have to pay higher taxes. It’d be disgusting if it weren’t so laughably detached from reality.
I’m going to remember this one. Extraordinarily lucid.
… additionally, mildly amusing to get outgroup empathy quotables from the self-described man with the cold heart. Life’s funny in many ways.
Makes me wonder how the market reacts if the US supply of interceptor missiles (particularly missile engines) dries up. https://www.newsweek.com/iran-israel-missile-defensive-systems-hypersonic-2087124 (and many others)
This would make Iran’s ploy of pre-warned attacks not seem so stupid.
Why would stocks care about that? What’s the impact of that for, say, Alphabet’s revenue? Or Nike’s profits?
You’ll have to forgive me: I was on the other side of this for a time, where that means I helped craft these sorts of nebulous bear narratives which were then blasted out to the investing public, and I can tell you from that experience that it’s just a never-ending scheme to monetize web traffic. That’s all it is.
I guarantee you that if I publish an article tomorrow called “Will Stocks Wake Up If Israel Runs Out Of Missile Interceptors?” it’ll get five- to 10 times more clicks than any other article I publish this week, and guess what? It’ll be completely useless for investors, because it’s a nonsense question. It supposes there’s some connection between an Iranian missile falling on an apartment complex in Beersheba and — whatever — Starbucks’ profit margins, when clearly that’s ridiculous.
As for Iran, there’s only one viable military strategy at this point: Build a nuke real fast in an underground facility no one knows about, announce it to the world and say “We don’t want to have to use this thing, but we will if we have to.” That’s it. Every other way out is non-military in nature. Mining the Strait’s just going to get them bombed again. On the missiles, remember that Iran’s supply of projectiles is finite just like Israel’s supply of interceptors. No one’s bombing the places where the interceptors are made, whereas Israel’s bombing Iran’s missile-building facilities, not to mention the launchers. Israel may eventually have depleted air defenses, but Iran has no air defenses right now, and won’t have any for the foreseeable future. So, I mean, how do you fight a war against a nation with a modern air force when you have no air defenses? How does that work?
Sure. Until Taiwan comes asking for those increasingly scarce armaments to stave off pressure from their big brother just 90 miles away?
Oil is fungible, chips are not.
Yeah, I mean derek, you seem to be leaning more and more in the “I’m irritable that stocks go up despite scary developments” camp the older you get. I’ve noticed that from you in the brief several years we’ve “known” each other. It’s mirrored in your tendency (and I’m with you on this, but it’s important not to overstate the case) to suggest that substantially all price action is systematics and buybacks, when in reality that’s just part of the story, and depending on the day, it might not even be the biggest part. Anyway, you know as well as I do that the best investment strategy is just to stay invested.
Mostly
As i get older I’m just getting increasingly annoyed by the belief that valuations drive share prices.
It was a long journey for me from when I first blurted out “P/Es don’t matter. They’re just a thermometer measuring demand for a stock.”
That was met with amused skepticism back in the early.00s when it first passef my lips.
That was a revelation I did not choose to dive into further.
In retrospect, that was a wise decision. No one cares. But I did start to follow and respect
Lazloi Birinyi”s pioneering early efforts to focus on flows in stocks rather than earnings forecasts and valuation forecasts.
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Mr. H,
Your rejoinders in the comment section alone are enough to justify the chunk of my social security I send you each month for the wit, wisdom,intelligence and plain common sense you deliver copiously, continually.
I’ve said it before…thanks for the notes from the sane. It makes it less lonely here.
All this risk just to tell a tale. At this point the GOP (Government Over People) tells so many lies I can’t really pay attention. By now (late on the 25th) it is crystal clear the we sent more than 300,000 pounds of ordnance to accomplish absolutely nothing, nada, or in the patois of Sir Donald, bupkis.
I think it is fair to ask it there is going to be a TACO order being made in the first couple of weeks in July. The market is giving Trump, Bessent and co. some rope to send out the new tariff bills in the mail. This is happening concurrently with the tax bill that won’t help a large majority of the population. The vibecession continues.
Sure. Until Taiwan comes asking for those increasingly scarce armaments to stave off pressure from their big brother just 90 miles away?
Oil is fungible, chips are not.
H-Man, well done, a great call — I went the other way and got singed. But I am back chasing the flow.
I think it’s less a frustration that stocks always go up no matter and don’t seem to care as a frustration that they (seem) so damn expensive like so many other things (houses, food, services, etc…) and nothing seems to be able to change it. We will be here in 2030 talking about how 50x PEs and 15x sales is normal
You’re on to something. There are a whole hell of a lot of people who are conservatively invested and have been since around the pandemic or even before. It seemed like the only responsible thing to do given the amount of chaos and uncertainty in the world, and the news flow has never turned good enough to feel like the right re-entry point has finally arrived. They’d love to just go all-in Mag 7, but like, at the 4Q18 lows. Meanwhile, WSB bros spent the better part of a decade yeeting their money at Tesla and Bitcoin and they’re killing it. That’s hard to watch when you’re being “responsible.”
People get way too caught up watching other people’s money. Who cares whether some kid on Reddit is “killin’ it” trading options on meme stocks? Who cares if somebody turned $5k into $250k on a Bored Ape or $50k into a million on Bitcoin? That’s not your money. Somebody’s always going to be richer. Your money should be the only money that counts in your book.
It’s how the casino keeps everyone playing. If the slot machine across the aisle from you didn’t flash and chime and be obnoxious when it paid out a grand to the old lady who sunk part of her grocery money into it, then you might think you don’t have a chance at winning and might stop playing. Also, jealousy helps get people to click on your article, just like the doomsaying. I find the same thing when it comes to entrepreneurship. I’m tired of seeing articles on how someone started a tech co all of 3 years ago and just cashed out for $50mm. I guess I’m supposed to be inspired??
This! I can’t tell you how many times I’ve told a client that, while the horserace can be a nice distraction, it can also make you do stupid things. Worry about your own benchmarks cause that is what keeps you fed.