Is the fog of war thinning or thickening? President Donald Trump has suggested that he is getting ready to declare victory. However, the Iranians have been at war with the US and Israel for 47 years and are showing no signs of ending it.
On Friday night, Trump posted on Truth Social that the US is "getting very close to meeting our objectives" and is considering "winding down our great Military efforts" against what he termed the "Terrorist Regime of Iran." Paradoxically, earlier that same day, he told reporters, "I don't want to do a ceasefire. You don't do a ceasefire when you're literally obliterating the other side." He seems to prefer a unilateral conclusion where the US stops because it has "won," rather than a negotiated truce.
Even as he mentions an exit, the Pentagon is reportedly deploying about 2,500 additional Marines and three amphibious assault ships to the Gulf. The President may or may not order the Marines to take over Kharg Island or to stop the Iranian blockade of the Strait of Hormuz. Saturday night, Trump threatened to "obliterate" Iran's power plants if Tehran does not fully reopen the Strait of Hormuz within 48 hours. That might require a proof of concept to work. The war ain't over till it's over.
Iran continues to block the Strait of Hormuz effectively and selectively. It is allowing tankers loaded with Iranian oil for China and India to pass through the Strait. Iran is also extorting tolls from vessels passing through the Strait. The Iranians are probably monitoring Polymarkets.com, which shows that the Democrats will win a majority in the House in November's midterm elections (charts). The Republicans might even lose the Senate. The Iranians must figure that if they can keep oil prices elevated through the US midterm elections, the Republicans will lose at least the House if not the Senate as well. They must hope that the Democrats might cut off funding for the war.
Now, let's review the impact that the war is having on the energy and financial markets:
(1) Oil. The Brent crude oil futures market anticipates that Brent will be down by $12, $23, and $33 in three, six, and 12 months, respectively (chart). In the near term, we don't expect the price to exceed the spike to about $120 on March 8. We expect it will fall closer to $80-$90 within the next few weeks. One way or another, oil will get through or around the Strait, in our opinion.
(2) Stocks. The S&P 500 is down 6.8% from its record high on January 27. It fell below its 200-day moving average at the end of last week (chart). We are still expecting a 10%-15% correction in the index from the January 27 record high. Our subjective odds of a recession and a bear market (with the S&P 500 down by more than 20%) remains at 35%. Nevertheless, we are sticking with our year-end target of 7700 for the S&P 500.
The war, which started on Saturday, February 28, increased the risk of a recession, which depressed the forward P/E of the S&P 500 (chart). The odds of a recession in 2026 are up to 35.0% according to Polymarkets.com. We are still betting on the resilience of the US economy, which has passed several stress tests since the start of the Roaring 2020s. We've recently observed that the US economy's energy intensity has dropped significantly since the oil shocks of the 1970s, as the US has become energy independent.
So far, industry analysts seem to agree with our assessment of the US economy's resilience. Notwithstanding the war, they continue to increase their S&P 500 earnings-per-share estimates for 2026 and 2027 (chart). As a result, S&P 500 forward earnings per share rose to a record high of $332.47 during the week of March 19. That's helped to offset some of the recent decline in the S&P 500 forward P/E, as discussed above.
Remarkably, even the consensus of analysts' expectations for S&P 500 companies’ Q1 earnings per share has been rising during the war so far (chart).
(3) Credit. The war has also weighed on the S&P 500 stocks’ aggregate forward P/E, as investors have concluded that even if the odds of a recession increase, the Fed is unlikely to cut the federal funds rate over the next 12 months (chart). That's because of the war's inflationary consequences. So there won't be a Fed Put even if the labor market and stock investors need it.
The recession odds have increased because any weakening of the economy resulting directly from the war is likely to widen cracks in the private credit and private equity markets, as evidenced by the fall in prices of ETFs that invest in this space (chart).
(4) Gold. As we noted last week, geopolitical turmoil is increasing, and inflation is heading higher. So why is the price of gold taking a dive since the start of the war (chart)? We observed that the US dollar has strengthened since then, which might have triggered profit-taking in gold. The answer might be more obvious. Countries in the Middle East are scrambling to spend more on defense, with payments made to companies that accept foreign currency rather than gold. So they are scrambling to sell their gold holdings
The price of gold is likely to fall further until the war ends. We are lowering our year-end target to $5,000 per ounce from $6,000. We are sticking with $10,000 by the end of the decade.
(5) Foreign stocks. Our recommendation to Go Global late last year has been upended by the war so far this year (charts). Nevertheless, we expect it to be back on course once the war ends.
