Resilience in the chaos: Markets soar despite Iran conflict
The Contradiction of Rising Stock Markets Amid Economic Downturns
The financial world is currently witnessing a paradox: while equity markets on Wall Street are reaching new highs, growth forecasts for the real economy, often referred to as Main Street, are being revised downward. This divergence has become particularly pronounced in light of ongoing conflicts and global economic disruptions.
Record Highs in Equity Markets
Despite the war in Iran disrupting global energy markets and shipping routes, which have had a negative impact on the world economy, stock indices in the US, Japan, and South Korea have all reached record highs. This week, the S&P 500 hit a new high of 7,273, while the tech-heavy NASDAQ-100 also climbed to an all-time high of 28,298.
In Asia, South Korea’s Kospi soared nearly 7% to a fresh record on Wednesday, while the TAIEX in Taiwan reached a peak of 40,885. The Nikkei 225 in Japan also hit a record high of 61,402. These indices are tied to economies that are heavily exposed to disruptions in the Strait of Hormuz, where around 80% of oil and oil products normally transit, destined for Asia.
Impact of the Energy Crisis
With an estimated 10–12 million barrels a day now disrupted, import-dependent economies such as South Korea and Japan face heightened energy risks. When the Iran war first broke out, the Kospi in South Korea fell by more than 20% until the end of March, while the Nikkei 225 in Japan dropped over 15% in the same period. Both markets came under particular pressure in the early weeks of the conflict, amid a broader global stock market sell-off, but have since fully recovered.
European Markets and Resilience
In Europe, the EURO STOXX 50 and the broader pan-European STOXX Europe 600 have not reached new highs since the Iran war began, after both touched record levels in the same week as the first US-Israeli strikes. However, both indices are trading less than 10% below those peaks, showing their resilience so far.
The Role of AI and Technology
This sharp divergence between record equity valuations and the reality of a slowing global economy, with oil prices at a 4-year high, underscores a significant shift in market dynamics. But what is driving it?
Silicon Dominance and the AI Wave
The main driver behind the record-breaking performance of Asian and US markets is the sustained momentum of the AI revolution. In South Korea and Taiwan, for instance, stock indices are dominated by semiconductor and memory chip makers that have become the backbone of the modern digital economy.
Alan McIntosh, Chief Investment Officer at Quilter Cheviot Europe, explained that this concentration of specific high-value companies has a significant impact on regional index performance. He noted that "the strong rise in South Korea and Taiwan, particularly, has been driven by the share prices of SK Hynix and Samsung, which together represent 44% of the South Korean market, while TSMC accounts for 45% of Taiwan's market."
These hardware giants provide the core infrastructure for AI development, a sector where demand appears to be largely disconnected from the current energy crisis. Even as the effective blockade of the Strait of Hormuz creates logistical challenges and pushes up production costs, demand for high-bandwidth memory and other critical hardware continues to rise.
Tech Giants and Earnings Growth
The trend is mirrored in the US, where Big Tech and other hyperscalers, including Amazon and Alphabet, Google's parent company, have used their vast capital reserves to sustain growth and increase AI-related spending, helping to lift major indices despite inflationary pressures on consumers.
First-quarter earnings comfortably beat expectations. S&P 500 companies had been forecast to deliver earnings growth of 13%, but reported growth of 28%, with the technology sector leading the gains and delivering the biggest positive surprises.
Russ Mould, investment director at AJ Bell, said, "research shows that the technology sector leads the way, with consensus forecasts pointing to 38% earnings growth this year and 25% in 2027, thanks to AI."
Technical Market Dynamics and Investor Optimism
Beyond corporate earnings and AI-driven growth, technical market dynamics may also have helped to fuel the rally, after investors initially oversold equities on expectations of the economic fallout from the Iran war.
Mould noted that the market’s rebound is partly being driven by a well-established pattern in investor behavior. He referred to research from Goldman Sachs suggesting that algorithm-driven trading firms and hedge funds had taken short positions in mid-March, only to be caught off guard by the market rally.
"As a result, they have had to cover those positions by buying equities, creating a multi-billion-dollar short squeeze," Mould said.
At the same time, investors appear to be holding on to hopes of a diplomatic breakthrough between the US and Iran. "There is still a belief in markets that the blockade of the Strait of Hormuz will end soon as it appears to be in the interests of both sides to end this quickly," McIntosh said.
Investors are also betting that corporate earnings in high-growth sectors can outpace the drag from geopolitical tensions, and if they fail to do so, central banks will meaningfully intervene and swiftly stabilize economic conditions.
"If the going gets tough, investors are accustomed to central banks saving the day with interest rate cuts, bailouts or unconventional monetary policy," Mould added.
Until higher energy costs trigger a clear slowdown in consumer spending, momentum from the AI sector appears strong enough to keep global indices near record levels. First-quarter earnings data suggest that, for now, this optimism remains grounded in financial reality.
