In the summer of 1914, as tensions escalated between Kaiser Wilhelm II’s Germany and Tsar Nicholas II’s Russia, financial markets on both sides of the Atlantic braced for impact. The London Stock Exchange closed for an unprecedented five months, while the New York Stock Exchange paused trading for four months, as investors braced for what they feared would be a disastrous continental war. Indeed, World War I proved to be a calamity on a monumental scale. However, by 1915, the NYSE had reopened, and by late 1916, the Dow Jones Industrial Average (DJIA) had more than doubled from its previous lows.
Fast forward to today, and there are echoes of that historical context in recent market behaviors amidst ongoing geopolitical conflicts. As the financial markets process the ramifications of the Middle East situation and the ongoing war in Ukraine, they appear to be recalibrating their responses. This week has seen crude oil prices rise by approximately $5 a barrel, propelled by renewed tensions in the Strait of Hormuz. Investors are keen to see how this will influence trading when markets open on Monday.
The S&P 500 has shown remarkable resilience, climbing 12.3% over the past three weeks to reach a new record high following a low point on March 30. The performance across various sectors indicates a solid risk-on sentiment, which is clear from the active leaderboard showing significant shifts in investment preferences. The DJ Transportation Average (DJTA) has surged 24.4% since the March 30 low, while LargeCap Pure Growth stocks have increased by 20.6% and the so-called “Magnificent-7” stocks have risen by 20.0%. Additionally, SmallCaps and MidCaps are also contributing to the market’s upward trajectory, marking a broad-based rally that many are referring to as a “melt-up.”
An analysis of market dynamics shows that the Nasdaq 100 Relative Strength Index (RSI) has experienced the quickest transition from oversold to overbought conditions in its 40-year history during this period. While the military conflicts may not have resolved, market activities suggest that traders are optimistic about an impending resolution. Following a strong close on March 31, the current target for the S&P 500 is set at 7,700, which appears increasingly feasible for the end of the year, pending market reactions in the short term.
Currently, analysts assign a 60% likelihood to a sustained bullish outlook for the “Roaring 2020s,” while a 20% chance remains for both a market melt-up and a potential meltdown. The underpinnings of this bullish sentiment lie in resilient earnings fundamentals. Despite the lead of the Magnificent-7 stocks, there is broad potential for market growth as the earnings landscape strengthens. Notably, 86.6% of S&P 500 companies now report positive 12-month forward revenue growth, while 81.8% showcase positive forward earnings growth—both metrics nearing historical peaks.
As the financial community looks forward, the trajectory of the stock market will heavily depend on external geopolitical developments and internal earnings performances, setting the stage for a keenly watched trading week ahead.
