S&P 500 Resists Iran War Sell-Off as Oil Shock Fades—But Will the Bull Run Hold If Strait of Hormuz Remains Closed?

The immediate catalyst is clear. The U.S.-Israeli war with Iran began on February 28. The market's first reaction was a sharp spike in oil prices, with Brent crude spiking to nearly $120 a barrel as traders feared long-lasting supply cuts. The Strait of Hormuz, a vital chokepoint for global oil, has been effectively closed, with Iran nearly halting traffic through the narrow waterway.

That initial shock has since pulled back. Prices have retreated from their peak, but remain elevated. As of recent trading, Brent crude was about $100.11 a barrel, and gasoline prices are up 20 percent since the war began. The coordinated release of 400 million barrels from strategic reserves has provided some relief, but the fundamental disruption persists.

The reaction in the broader financial markets tells a different story. While Asian stocks fell broadly on the news, the S&P 500 has fallen just 2 percent since the war began. That is a muted response to a conflict threatening to roil the global economy. The pattern is familiar: investors have repeatedly looked past recent geopolitical upheaval, focusing on other supporting factors in the market.

This contrast frames the core question. Is this a contained, temporary disruption that will be resolved before causing lasting damage? Or is it a fundamental breakdown that will force a reassessment of risk and valuation across markets? The elevated oil prices and closed strait suggest the latter, but the stock market's resilience hints at the former. The setup now hinges on the duration of the conflict and its impact on energy flows.

Assessing the Economic Damage: Inflation, Growth, and Policy

The market is now balancing two powerful, conflicting forces. On one side is a clear inflationary shock. The war has turned a geopolitical event into a global energy supply shock, with traders rapidly reassessing how hawkish central bankers will need to be. The longer the disruption persists, the greater the potential economic damage, particularly for Asia and Europe, which are most vulnerable to supply chokepoints like the Strait of Hormuz. This creates a direct risk of forcing central banks to keep rates higher for longer, a scenario that weighs on stocks and bonds alike.

Yet on the other side, the baseline forecast for the U.S. economy remains robust. Goldman Sachs Research expects healthy economic growth and Fed easing to propel the U.S. stock market this year, forecasting a 12% total return for the S&P 500. Their outlook is built on solid GDP growth, corporate re-leveraging, and a productivity boost from AI adoption, which they see driving double-digit earnings growth. This creates a powerful counter-current to the geopolitical headwinds.

The result is a market in a state of tactical tension. The S&P 500's muted 2% decline since the war began shows a remarkable resilience to date, likely fueled by this strong domestic earnings narrative. But the elevated oil prices and closed strait are a persistent source of friction. The setup hinges on duration: if the conflict resolves quickly, the inflationary shock may be contained. If it drags on, the pressure on central banks and the global economy could overwhelm the domestic growth story, forcing a reassessment of the "higher for longer" rate environment and the valuation of risk assets. For now, the market is betting on a quick end, but the economic damage is already being priced in through higher energy costs and increased uncertainty.

The Market's Tactical Setup: Volatility vs. Trend

The market's current action looks like a classic geopolitical pause, not a trend reversal. The S&P 500 is still within 4% of its all-time high, and its best day since the war began was driven entirely by a sharp drop in oil prices. That event-driven move underscores the setup: the stock market's primary reaction is to the energy shock, not the war itself. When oil fell 5.3% on Monday, the S&P 500 climbed 1%, showing how directly the two are linked in this cycle.

Historically, this pattern of initial volatility followed by a rebound is common. A review of 17 geopolitical shocks since 1939 shows the average one-week drop in the S&P 500 is just 1.09%. More importantly, 12 months after each crisis, the index posted an average gain of 2.92%. The key difference this time, as noted by the Stock Trader's Almanac, is the economic backdrop. Unlike after the Ukraine invasion, the U.S. economy appears on more stable footing, which could support a quicker bounce if the conflict resolves.

The tactical watchpoints are clear. First, monitor oil price stability. Prices have pulled back from their peak, but the fundamental supply disruption through the Strait of Hormuz remains. If oil stays elevated above $100, it will keep inflation expectations high and pressure central banks. Second, watch for any shift in Federal Reserve policy expectations. The market is currently betting on a quick end to the conflict, but if the war drags on and inflation persists, that narrative could fracture, forcing a reassessment of the "higher for longer" rate environment.

For now, the market is treating this as a temporary shock. The resilience shown in the S&P 500's muted 2% decline since the war began, and its ability to rally on oil relief, suggests the bull trend is intact. The setup is one of choppiness, not collapse. The real test will be whether the conflict's duration can be contained before the energy shock fully materializes into a broader economic slowdown.