Market Thoughts: Give peace a chance

“WAR IS OVER! IF YOU WANT IT” was a global campaign launched by John Lennon and Yoko Ono in December of 1969. It was meant to empower a movement to end war in Vietnam. It took until 1973 for the U.S. military to withdraw as part of a declared ceasefire. Fighting didn’t stop until 1975.

I think it’s important to focus on context and market drivers when pundits declare with the flick of a wrist a ceasefire driven ‘relief rally’ marks swift reengagement of animal spirits. It doesn’t.

Investors raced to trim hedges and bearish positioning in case the current ceasefire proves a step towards negotiated settlement. The reality seems to rhyme more with the U.S. opting for a “least bad” off-ramp. Increasingly, the political cost of escalation weighing on Washington.

Investor relief came from perception the U.S. is trying to step back from war. It doesn’t mean that’s where we’ve landed. The simple, and I believe correct, initial market reaction? An extreme left tail event was avoided. I hope that proves to be the case.

Both Iran and the U.S. hold maximalist demands to end the war. Calling those positions a ‘starting point’ seems, on the surface, charitable. The U.S. wants to eradicate Iranian ability to build nuclear weapons. Also, reopen the Strait of Hormuz.

The Iranian regime is anchoring on survival. They need sanctions relief. They’ve learned they have power over the flow of traffic in the Strait. From geopolitical and national security professionals, the only way the U.S. can stage withdrawal is diplomacy. Eventually engaging Gulf and European allies.

Where does that leave markets? Less fearful of escalation in the war and Iranian retaliatory response on Gulf neighbors. Risk hedges have been trimmed accordingly. But there hasn’t been, looking at flow data, a marked increase in risk-taking by institutional or retail investors. There shouldn’t be.

I think we’re stuck in a moment of watching markets churn. Investor uncertainty is high. For friends and colleagues across trading floors globally, the mantra remains to do no harm. Intra-day trading continues to offer opportunity to make a little money. The past month resoundingly providing an equal chance of losing, on a bad day, even more.

Investor focus will pivot to first-quarter earnings. For the S&P 500, consensus forecasts call for 12-14% earnings growth over last year. As a starting point that strikes me as reasonable given momentum. What concerns me ahead is that forecasts call for similar growth (and higher) this year and next.

Last year analysts played the game of putting out lower forecasts that companies beat. A ‘feel good’ vibe. Current forecasts seem to signal analysts are raising the bar on the earnings outlook. Last year inspired a little greed. This year, uncertainty about the ‘yellow brick road’ ahead.

That still might encourage inflows into risk assets. It helps argue, on a forward-looking basis, markets have de-rated from last year’s froth. Forward price-to-earnings growth ratios only look less expensive if those high-hope earnings projections are delivered upon.

A pocket that may surprise to the upside? Big tech hyperscalers. Concern about them has anchored on capex spending and declining free cash flow (FCF) generation. As infrastructure spend is brought on line and monetized, we may see FCFs begin to re-accelerate.

Investor optimism prevails until proven wrong. That’s an argument not to overreach for risk in the current environment. A theme I continue to pound the table on. Likewise, not racing to hide in cash. If you find yourself with overextended risk positioning, diversify and/or hedge it.

“All we are saying is give peace a chance…” John Lennon

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 4/9/26

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