After a brief pullback tied to the conflict in the Middle East, markets have rebounded sharply in recent weeks. The S&P 500 declined nearly 10% at the onset of the conflict but has since recovered to reach a new all-time high. Notably, this recovery occurred in just 11 trading days, marking the fastest rebound to a new high following a drawdown of this magnitude in more than 70 years.
This type of rapid movement serves as a reminder that markets can behave in unexpected ways over the short term. It also reinforces the importance of avoiding emotionally driven decisions during periods of volatility.
While the recent rally has been strong, uncertainty remains. The current ceasefire is set to expire, and there are ongoing questions about whether tensions could escalate again. As a result, it is still too early to conclude that risks have fully subsided.
Markets have recovered quickly, but the broader environment remains fluid.
One of the key drivers behind the market’s resilience has been the continued strength in corporate earnings expectations. Despite geopolitical uncertainty, earnings estimates for S&P 500 companies have increased each week since the conflict began. This has provided important support for equity markets and helped bring investors back into the market after an initial move to the sidelines.
As earnings season progresses, the focus will shift toward forward-looking commentary from companies. In particular, investors will be watching for updates on hiring, capital investment, and how businesses are planning for the months ahead given the current environment.
Earnings expectations continue to support the market despite ongoing uncertainty.
At the same time, the bond market is telling a somewhat different story. Treasury yields remain elevated compared to levels seen before the conflict began, reflecting ongoing concerns about inflation. Higher energy prices continue to contribute to these pressures, and as a result, expectations for Federal Reserve rate cuts have been pushed out. Markets are currently not anticipating rate cuts until next year.
The fact that equities have rallied even as interest rate expectations have shifted highlights the competing forces currently influencing markets. On one hand, earnings growth remains strong. On the other, inflation concerns and higher yields continue to present potential headwinds.
From a portfolio perspective, this environment supports maintaining a balanced approach. Portfolios entered this period with a neutral allocation to equities, and that positioning remains appropriate today. While the recent rally has been significant, it is not yet clear whether conditions will stabilize or if volatility could return.
If the ceasefire holds and inflation pressures begin to ease, the impact on economic growth and corporate earnings is likely to be limited. However, if tensions escalate or inflation remains elevated for longer than expected, markets could face renewed pressure.
For now, maintaining discipline remains key. Markets have demonstrated how quickly conditions can change, and staying focused on long-term fundamentals continues to be the most effective approach.
As always, if you have questions about how current events may affect your portfolio, please reach out to your financial advisor.
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
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Video Transcript:
Adam Phillips:
Well, welcome back everyone. We took a couple of weeks off there. I was actually out on spring break with my family, uh, for a little while there, and the market's actually ripped higher in my absence. Maybe I should go on vacation a little bit more often. And I think it actually just tells you the market doesn't wait for anyone.
What we've, what we've seen in the markets is following. Close to a 10% draw down in the s and p 500 when the war in Iran began. We've actually seen the market come roaring back. We're back at an all time high. If you look at the s and p 500, in fact, we rebounded to an all time high in 11 trading days. So that is the fastest going back in about 75 years.
If you look back at previous drawdowns that exceeded 8% in the s and p 500. This is the fastest return to a new high since 1950. So I think it's also a very good reminder that the market, at least over the short term, can do things that maybe surprise us. And it's why we don't wanna give into emotions, uh, and panic.
Uh, at times like this, we know there's still a lot of uncertainty. The cease fire that was announced recently, it is set to expire here on Wednesday night. As we're recording this, we're hearing talks that President Trump says he does not expect the cease fire to be extended, so we'll see. As Yogi Berra said, it's not over till it's over, so we can't celebrate just yet.
Uh, I think one can, can, uh, maybe question whether the rally, the magnitude of this rally was justified. I can certainly point to reasons, uh, to explain why the market. Has been behaving the way it has, but I could also, uh, support the case that maybe things have, uh, we, we've gone from a short term oversold position to a short term overbought position here, at least over the near term.
So we're remaining, uh, neutral as far as our equity stance goes. We came into the conflict positioned appropriately, and so we haven't made a lot of changes to the portfolio. We are continuing to watch things. One of the reasons that the market has. Really rebounded so sharply is the, as we saw when the, when the, and we've talked about at the outbreak of war, we were watching earnings estimates and we noted that they continued to move higher, which was a little bit of a surprise, but I think many would be surprised to hear that earnings estimates for the s and p 500 has a, have actually moved higher in every single week since the conflict began.
We are now. In the earlier endings of the current earning season. So we're starting to hear from companies. We started off with hearing from the banks last week. We'll hear from more in the coming weeks, and so I think it's really gonna be interesting to hear. Not necessarily about what companies have to say about their most recent quarter, uh, quarter's performance, but what they expect going forward.
Are they, are they making plans for the next several months as it relates to investments or hiring in light of current uncertainty? So I think [00:03:00] that's what we're really waiting on so far. The earnings outlook remains supportive. So with the announcement of the ceasefire more recently that along with the fact that earnings have continued to move higher, I think that gave a lot of people who had moved to the sidelines enough of a reason to get back in.
And so we certainly saw that come, uh, in, in recent days, and that's why we are back now, back to trading to all time highs. Now, at the same time, if we shift our focus to the bond market, we see that the bond market tells us a little bit of a different story. If we look at the 10 year yield on, on treasuries, we actually note that treasury yields are still well above where they were just before the conflict began.
That is, uh, really an acknowledgement that the inflationary outlook is, is still a little bit of a question. We know that energy prices have moved higher because of that. The Federal Reserve is likely to be on pause here with respect to monetary policy for longer than it had been expected, at least at the beginning of the year.
So if we look at current pricing, the market is not expecting the Fed to cut rates until next year. So we'll keep an eye on this and see where it goes. But I, I do think it's interesting to note that the rally in equities has, has continued despite the fact that energy and oil prices are still 35% higher.
Than where they were before the conflict began. That tells us that there are still some infl inflationary pressures there. Now, these can be short-lived, but ultimately, as we've said since the the beginning of this conflict, it all depends on the duration. If we now think that the ceasefire will hold.
Maybe there will be some job bonding back and forth. We think it is. We hope that it's just posturing by both sides as, as they work out, uh, the terms of a long-term agreement. Uh, then we expect that, that the hit to inflation will be short-term. The hit to ultimately economic growth and the earnings outlook will be short-lived.
And so that does support the case for at least a neutral positioning in terms of equities and broader risk assets. And so that's how we're positioned right now. That being said, we are not. Necessarily out of the woods. So this is still a very fluid environment, and so we'll be keeping an eye on things on your behalf.
If you have any questions, please don't hesitate to reach out to your financial advisor and we'll look forward to seeing you next week.