Iran Deal Removes a Headwind for Markets
Executive Summary:
Geopolitical Relief and Market Breadth: The interim U.S. – Iran agreement has removed a significant headwind for the markets. This development has sparked a broad equity rally and a plunge in volatility. The details of the deal are less important for markets than the fact that it is now clearly in the rearview.
Earnings-Driven Multiple Compression: The S&P 500 is up 8.6% year-to-date, but strong implied earnings growth of 18% has left the index's forward P/E valuation 9.5% cheaper than at the start of the year. This dynamic is most pronounced in the Technology sector, where explosive AI-driven earnings expectations have led to multiple contraction. The market is currently treating this tech earnings surge with skepticism, akin to a sudden commodity spike, requiring proof of durable cash flows to justify future multiple expansion.
SpaceX IPO and Shifting Fed Expectations: The massive, drama-free SpaceX IPO (reaching a $2.1 trillion valuation on day one) has acted as a constructive referendum for markets, resetting momentum for risk assets and upcoming AI-related public offerings. Looking ahead to the week, focus shifts to incoming Federal Reserve Chair Kevin Warsh's first meeting. Markets will heavily scrutinize the Fed's tone and projections, as futures pricing has aggressively shifted from expecting rate cuts before the war to fully pricing in a rate hike by January 2027.
Full Commentary:
This interim agreement between the U.S. and Iran to end the war (hopefully) and reopen the Strait of Hormuz has unleashed an “everything rally” across the globe, save for the oil price and the U.S. dollar (let’s see how these next 60 days of negotiations turn out). Surely there will be a lot of ink spilled over the ensuing weeks on winners and losers, why, what, when, where, and how – from an investment perspective, almost all of it amounts to noise. What matters for markets is that for the most part it's in the rearview mirror, which means the uncertainty that was putting a bid in oil prices, causing upward pressure on inflation, and therefore interest rates and Fed hawkishness is abating. There is no doubt that the President has left the hard part for later, but investors are less focused on those details and more focused on the removal of an unnecessary risk factor.
That doesn’t mean the significant disruption to global supply chains and shipping logistics gets ironed out overnight, but an uninhibited path to cleaning it up is an important development for markets. There is, after all, a long row to hoe to bring the daily traffic of oil back to the pre-war norm of 18 million barrels per day (mbd) from the estimated 3 mbd we expect to see over the coming month. The insurance industry’s response will obviously be another factor to consider, and it knows that removing the mines (if they exist) is going to be a lengthy process.
Those writing obituaries for the price of oil and oil stocks may want to double-check their math, as global SPRs have been drawn down dramatically and will need to be replenished, and commercial stockpiles are under huge stress (at nearly 20 million barrels, where major complications set in). Ergo, as oil prices and E&P energy stocks overshoot to the downside, an attractive buying opportunity for long-term investors seeking exposure to well-managed, high cash-flow-generating businesses with strong balance sheets will beckon.
As for equity markets, they are up strongly today with the VIX plunging (slipping to 16 and back below all of its major trendlines), which will trigger buy orders from Vol-control funds and other quant-driven strategies. As for the last week, the S&P 500 (+0.6%) lagged most foreign equity markets, MSCI Emerging Markets (+5.0%), Europe (+2.8%), and Japan (+2.2%) on a dollar-return basis, with those markets reacting more favorably to the slide in oil prices. Small caps were the standout performers in the U.S. for the same reasons that foreign markets performed well, as the Russell 2000 ramped +3.8% while squeaking out a new all-time high. The Nasdaq 100 (+2.5%) remained strong as the AI renaissance and momentum trade was reinvigorated after a swift and deep multi-day correction.
With the Iran conflict slipping into the rearview, markets have a window (until the next exogenous event blindsides it) to refocus its attention on underlying fundamentals. On this note, I’m going to piggyback on some work put out by Nick Colas of DataTrek over the weekend, where he broke down the performance of the S&P 500 and its sectors by the change in valuations (12-month forward price/earnings multiple) vs. the change in earnings. The following table is from his piece, with the first column: YTD price return, followed by the implied change in earnings, and the change in Forward P/E. The last two columns compare where the forward P/E ratio was at the start of 2026 to where it is as of the end of last week.
Let’s start with the big-picture message of this data before getting into the details: the S&P 500 is up +8.6% year-to-date, while implied earnings have increased 18%, which means valuations (forward P/E) are 9.5% cheaper than at the start of the year. I’d argue it's this strong earnings tailwind that was the driving force behind the equity market's ability to push higher throughout the Iran conflict.
This broad multiple compression is driven by the fact that eight of the eleven sectors are cheaper now than at the beginning of the year. Interestingly, this P/E contraction has been more pronounced among the underperforming sectors, which average an 8.9% drop, compared to a softer 5.5% contraction for the market's winning groups. This divergence illustrates fundamentals driving performance, where the ‘outperforming’ group experienced implied earnings growth of +23.6% vs. +7.6% for the ‘underperforming’ group, and ultimately highlights the collective wisdom of the markets in accurately pricing those realities.
The Tech sector warrants special attention, given its massive 37% index weighting in the S&P 500 – a footprint larger than the next three sectors combined. Tech has delivered an impressive 28.4% YTD return, making it the second-best performer behind Energy (28.7%). Yet, despite this phenomenal price action, Tech's forward P/E multiple has actually shrunk by 11.8%, a steeper contraction than the broader market.
This divergence between rising prices and falling multiples is entirely explained by a massive upward revision in fundamentals. The market has boosted its expectations for Tech’s earnings power by a staggering 40.1%. To put that in perspective, the only other sector experiencing that kind of fundamental markup is Energy (+47.4%), which has been driven exclusively by this year's oil price shock.
Essentially, with multiples contracting alongside growing earnings, the market is treating the explosive AI-driven demand for semiconductors and other hyperscaler capex hardware as if it were a sudden, and perhaps fleeting, commodity spike—analogous to the unexpected fundamental surge in the Energy sector. To be fair to the market's skepticism, some of this Tech earnings growth is one-time in nature (driven by mark-to-market gains on investments in SpaceX, Anthropic, and OpenAI by several early Big Tech backers) and, therefore, does not inherently deserve further multiple expansion.
Looking ahead, the primary challenge for U.S. equities in the second half of 2026 isn't to raise the earnings bar but to convince a skeptical market that these robust cash flows are durable. In other words, all this hype over AI capex investment that has benefited the ‘picks and shovels’ companies (semiconductors, memory, construction & engineering firms…) needs to start showing quantifiable returns on investment; if not, a further derating is likely.
Another big event that went off without a hitch last week was the SpaceX IPO, which came to market at a roughly $1.75 trillion market cap. Following a 19% day-one jump, it saw its value climb to $2.1 trillion—making it the sixth most highly valued company in the U.S. public market. The 19% jump on the day of its IPO is on par with the average one-day gain for IPOs; the fact that this happened for a company of this size is impressive.
I’ll be curious to observe how the stock performs going forward. When you measure IPOs from the first-day closing price forward over three to five years, they tend to underperform comparable non-IPO firms (matched on size and book-to-market). So, the public market buyer (the person who buys at the close on day one) has historically earned below-market returns over the following half-decade. And that is because the initial pop is set by short-term supply/demand and information flows, not by fundamentals.
Don’t get me wrong, I’m rooting for this company, and if they can deliver on even half of what they suggest is possible, the world will be a better, more prosperous place. I personally don’t know if there is much of a need to colonize Mars, but this is coming from a guy with a very limited imagination.
Nevertheless, claiming that the Total Addressable Market for its business is $28.5 trillion (nearly the size of today’s entire U.S. economy) and the underwriters estimating a 100-fold surge in its AI revenues to $322 billion by 2030, with total revenues potentially reaching $3.4 trillion by 2040 (from $18.7 billion last year) is beyond lofty expectations even for this unimaginative analyst.
Regardless of one's opinion on SpaceX, the IPO came, went, and was digested with no drama. This was a constructive development for markets and now acts as a referendum on other IPOs coming to market later this year (Anthropic and OpenAI) as well as resetting the wind behind the AI momentum trade and risky assets in general. If you think the valuation on SpaceX is in the stratosphere, OpenAI’s projection last year that its revenue would soar to $145 billion by 2029 requires a compound annual growth of 108% for five years, which has never happened to any U.S. company in the past.
As for the coming week, we’ll see where this latest Trump deal-for-a-deal with Iran takes us (if anywhere), and the key development for the week will be Kevin Warsh’s first meeting as Fed Chair on Wednesday. No rate change expected, but the key will be the tone of the press statement, the number of dissents if Warsh wants to pivot more dovishly, along with the fresh set of dot plots and economic projections. In any event, we were priced about halfway for a rate hike by year-end the last time the Fed met six weeks ago, and now the futures market is treating it like a fait accompli – so anything less than super-hawkish and we could well see the relief rally in the bond market get extended.
Currently, the market has priced in only a 10% chance of a hike in July, 34% by September, 47% by October, and only an 82% chance by December. It’s not until the January 2027 meeting that the market has a full hike priced in. This meeting is all about whether that policy path is appropriate given economic developments and current market pricing, which has moved from pricing in three cuts by the end of 2027 before the war started to currently pricing in one hike (see chart below from 3Fourteen’s Warren Pies).
One thing to keep on the radar is Gold, which at its lows last week had given up all its gains for the year, and was off 25% from its late-January all-time high. The yellow metal is on pace for its second-worst monthly performance (-5% so far in June) outside of the March drawdown (-11%). Investor positioning and sentiment has flipped from wildly bullish at the end of January to almost the complete opposite side of the boat as of last week. According to data from Goldman Sachs, CTA positioning in Gold has collapsed toward the 1st percentile on a 1-year lookback, ETF holdings have fallen by roughly -870k ounces, and put-call skew has now risen to nearly decade highs on downside demand.
The price action in gold throughout the Iran conflict was confusing to many, myself included, given that it didn’t act at all as a defensive/safe-haven asset. To be honest, it was the exact opposite and behaved like a high-beta momentum asset being unwound and liquidated. Nevertheless, it looks to me like the table has been reset for the barbarous relic, which offers a compelling upside case for expressing a more dovish macro view.
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