U.S. Stocks hit record highs this week even as the Iran war continued, defying expectations that a Middle East conflict would drag markets lower.
The S&P 500 closed at an all-time high on Thursday, about 11% above its March 30 low, after erasing all losses from the war’s early weeks. Oil prices fell alongside equities, reinforcing the impression that the energy shock from the Strait of Hormuz blockade might be short-lived.
Yet the rally has puzzled analysts. With active fighting, disrupted shipping, and forecasts of prolonged economic strain, the market’s optimism seems at odds with the present reality.
The explanation lies not in today’s headlines but in what investors expect six to twelve months ahead. As Joe Seydl of J.P. Morgan Private Bank put it, “The stock market isn’t trying to price what’s happening today. It’s always trying to price what the world is going to look like six to 12 months from now.”
That forward-looking lens has been shaped by recent history. Investors point to April 2025, when President Trump imposed sweeping tariffs that triggered a 12% market drop — only to reverse course within days after seeing the sell-off. The episode reinforced a belief, economists say, that Trump will back off when economic pain mounts.
For more on this story, see U.S. stock futures flat as Trump confirms Israel-Lebanon ceasefire, tech stocks lead rally.
Mark Zandi of Moody’s called it the “TACO” trade — shorthand for “Trump always chickens out.” He noted that investors have been conditioned to expect the president to pivot, declare victory, and move on before tensions inflict lasting damage.
The conditional ceasefire announced on April 8, which hinges on reopening the Strait of Hormuz, has been read as confirmation of that pattern. Traders see it not as a permanent resolution but as a signal that de-escalation is possible — and likely — if costs rise too high.
Dominic Wilson of Goldman Sachs acknowledged the disconnect in a recent podcast, observing that markets are pricing in a normalization of oil flows and a near-term end to hostilities, even as geopolitical risks remain elevated.
This follows our earlier report, Ibex 35 Rises as US-Iran Peace Optimism Drives Down Oil Prices.
Still, the bet carries risk. If the conflict drags on or escalates, the current optimism could unravel quickly, leaving portfolios exposed to a sudden reassessment of risk.
For now, the market’s message is clear: it is pricing not for war, but for its swift end.
Why did stocks rise despite the ongoing Iran war?
Investors are looking past current hostilities and betting that the conflict will be resolved quickly, based on past patterns where the Trump administration reversed policies after market turmoil.
What is the ‘TACO’ trade and how does it influence market behavior?
The ‘TACO’ trade refers to the belief that President Trump will back down when economic pain intensifies; investors have been conditioned to expect this, leading them to shrug off geopolitical risks as temporary.
