When’s Opening Day?

U.S. equities declined for the fifth consecutive week as geopolitical tensions in the Middle East collided with inflation risks and a reassessment of monetary policy. A supply disruption in the oil market has sent shockwaves across the world from higher gas prices in the United States to national emergencies in countries dependent on oil imports, such as the Philippines, Vietnam and others. The war in Iran continues to be a fluid situation with no interest of de-escalation from Israel and lack of willingness for ceasefire talks between Iran and the United States. Energy prices will likely continue to grind higher as investors are left wondering when opening day is for The Strait of Hormuz.

The S&P 500 lost 2.1% last week, while the tech-heavy Nasdaq declined 3.2%. Meanwhile, the Dow lost 0.9% over the five-day period. Both the Dow and the Nasdaq officially entered correction territory, or down more than 10% from recent all-time highs. In fact, the weakness in growth stocks has been an issue prior to the outbreak of conflict, with the Nasdaq posting negative returns in 10 of the last 11 weeks. One positive is that stocks are becoming much more attractively priced on a valuation basis than when we entered the year. Looking at the glass half full, corrections in major indices are typically associated with stronger-than-average forward returns over the next year.

Let’s rewind to understand how the landscape for equites has shifted in the first three months of the year. Stocks finished 2025 on a high note with the major indices up more than 10% for the third consecutive year in a row. Valuations were the main headwind as they neared record territory on prospects of continued strong earnings growth, inflation trending back to 2% and a supportive Federal Reserve (Fed). As war broke out in the Middle East, a lot of the tailwinds coming into the year began to get disrupted by higher oil prices, which have pushed inflation expectations upward and put prospects for rate cuts on hold. As uncertainty builds around the duration of the conflict, investors have become a lot less willing to pay up in terms of valuation. This can be seen by the derating in stocks since the start of the conflict, but earnings estimates in the United States are yet to be impacted materially. In fact, the S&P 500 has dipped into a high teens forward price/earnings multiple for the first time in roughly a year.

The path of least resistance remains to the downside for equities without a clear path for de-escalation in the Middle East. Global petroleum markets are still trying to price in a 10% hit to supply with sharp swings in energy prices daily. Additionally, supply could be further disrupted by the Houthis who have entered the conflict and could put pressure on energy flows through the Red Sea. Even prices at the pump have surged in just a short period of time with U.S. consumers now paying about $1/gallon more for fuel. That hit to the consumer’s wallet is already being felt and tends to lead to less spending on discretionary items. The Fed is now managing a much tougher backdrop with inflationary pressures from fuel and the possibility of slower economic growth both domestically and globally.

Meanwhile, the fixed-income markets have borne the brunt of the shifting macroeconomic narrative, undergoing a recalibration as inflation risks have surged. The U.S. Treasury bond market has sold off sharply, with investors demanding higher risk premiums due to the shock to oil supply. Consequently, two-year Treasury yields surged to 3.91%, while 10-year yields pushed past 4.42%. This price action reflects a pivot in interest-rate expectations from just three months ago. At the start of the year, the market was pricing in multiple Fed rate cuts; now, traders are putting higher odds on a rate hike than a rate cut in 2026. As central banks globally remain cautious and on hold, it is important to remember not to fight the Fed as monetary policy tends to drive financial markets.

There are a few key areas of the market to be watching for a rebound in stocks. Investor sentiment has been dampened by the rise in the price of oil, interest rates and the dollar all moving upward in sync. The other area of the market to watch for is earnings estimates as we approach first-quarter earnings season in April. Historically, earnings-per-share growth has not been sensitive to changes in oil prices. The greater threat to earnings is not oil prices themselves, but a prolonged period of severe disruption that impacts supply chains and materially drags on global economic growth.

Looking ahead, the main driver of financial markets this week will be developments on the U.S./Isreal-Iran conflict. Any further intensification of the war will likely be met with increased downside volatility in markets until there is an indication that there is a path to more oil supply coming back online. President Donald Trump announced a 10-day extension of a pause in U.S. strikes against Iranian energy infrastructure until Monday, April 6. The goal is to pressure Iran into negotiations and reopening the Strait of Hormuz. Investors will have a hard time finding a direction until there are steps towards either a ceasefire or another wave of broader military involvement. For the United States, escalation could look like attacks on energy infrastructure, boots on the ground to forcefully reopen the Strait of Hormuz or attacks on the water supply. Alternatively, de-escalation with the return of oil flows will likely spark a rally in equities.

Economic Calendar March 30 – April 3

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