When news first broke about the United States’ entry into a major military conflict with Iran, investors expected the stock market to collapse.
Major geopolitical incidents in the history of financial markets have led to fear and uncertainty in the stock market. The prices of oil skyrocket and investors seek safe havens, resulting in a sharp fall in the stock market. But this is not what has happened this time.
Despite the rising tensions in the Middle East, the S&P 500 has surprisingly held up well. The stock market has not seen anything even close to what happened in the past.
A video was uploaded by financial YouTube channel Proactive Thinker, which has more than 1.15 million subscribers, discussing some reasons why the stock market has remained stable despite the ongoing conflict.
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What you'll learn 👉
Oil Prices Are Rising, But the U.S. Has an Advantage
One of the major concerns during any conflict in the Middle East region revolves around oil. Iran has already threatened the shipping routes in the Strait of Hormuz. This is a very narrow region where about 20% of the world’s oil shipments are made.
Any problem in this region will lead to an increase in oil prices. In fact, oil prices can go as high as $150 a barrel. But investors are not panicking as they would have in the past. The reason for this lies in the fact that America has become the world’s largest oil producer.
Unlike the oil crises in the 1970s, America’s economy does not rely as much on oil from the Middle East. In fact, a major portion of America’s oil comes from Canada. Because of that, markets don’t see the same type of systemic oil crisis that once shook global economies.
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Investors Expect the War to Be Limited
Another reason markets haven’t collapsed is simple expectations. Many people who are investing in the market feel that the conflict might not escalate into a global war.
Former President Trump stated that the conflict might not last for a long time, and based on this statement, many traders feel that it might calm down soon.
When the end of a conflict is unknown, financial markets react more drastically. However, in this case, it seems that people are betting on its stabilization. This might prevent panic sales, which often lead to market crashes.
War Spending Can Actually Support the Economy
Another factor to consider is government spending. When there is a war, governments usually increase their spending significantly, especially on defense and other supporting factors.
In economic terms, this can be described as increased demand, which can subsequently increase corporate revenue and profits.
In most cases, this spending has helped in economic growth, especially in times of war, despite the rise in geopolitical risks.
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Inflation Changes the Investment Game
Higher oil prices also create inflation pressure across the economy. Normally, rising inflation is negative for markets because it can prevent central banks from lowering interest rates. But inflation also weakens the value of cash.
When cash loses value over time, investors often prefer to hold real assets such as stocks, companies, or commodities rather than sitting on large amounts of money.
That dynamic can actually keep capital flowing into the stock market, even during uncertain periods.
The AI Boom Is Still Driving Markets
There is also a much larger structural trend supporting stocks right now: artificial intelligence.
The global race for developing infrastructure for AI is highly concentrated in the United States. Some of the major companies investing billions of dollars in developing AI are among the largest companies in the S&P 500 index.
This technological shift is expected to change industries over the next decade, and many investors think so.
Because of this, large institutional investors are not willing to withdraw money from equities and risk missing the next big growth cycle.
Lastly, markets have somewhat become used to political surprises. In fact, in the past few years, major announcements on policies, trade wars, and other geopolitical events have repeatedly caused market movements that have ultimately turned out to be short-lived.
Having gone through a number of such events, markets seem to be holding back before reacting to the latest news.
Rather than selling stocks in panic, markets seem to be holding back and assuming that things will eventually calm down.
However, markets may still react later. It does not necessarily mean that the stock market will not react to the war.
If the conflict grows and starts disrupting oil supplies or pushing inflation higher, markets could still see bigger swings in the days ahead.
But right now, investors are weighing several things at once, the war itself, strong company earnings, government spending, and the long-term growth coming from new technologies. With all of that in the mix, the market hasn’t panicked. That’s why stocks haven’t crashed so far.
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