Oil stabilized near $90 per barrel<\/li>\n<\/ul>\nThe reopening of the Strait of Hormuz \u2014 a critical global shipping route \u2014 and a ceasefire between Israel and Hezbollah added to the optimism.<\/p>\n
At the same time, Bank of America\u2019s cross-market risk gauge is heading for one of its fastest declines on record, reflecting a sharp drop in perceived market turbulence.<\/p>\n
A macro strategist said, \u201cMarkets are moving as if the conflict is already resolved \u2014 not just de-escalating.\u201d<\/em><\/p>\nFastest Recovery Since Pandemic Raises Questions on Sustainability<\/h2>\n
One of the most striking aspects of the rally is its speed.<\/p>\n
The S&P 500 moved from its war-induced lows to record highs in just three weeks, marking one of the fastest recoveries of this scale in history.<\/p>\n
Such rapid rebounds are typically driven by:<\/p>\n
\n- Short covering<\/li>\n
- Liquidity flows<\/li>\n
- Fear of missing out (FOMO)<\/li>\n<\/ul>\n
In fact, systematic traders and commodity trading advisers, who were initially positioned defensively, were forced to flip long and chase the rally \u2014 further accelerating the move.<\/p>\n
Oil, Inflation, and Supply Chains Still Reflect War Damage<\/h2>\n
Despite the rally in financial markets, the physical economy tells a different story.<\/p>\n
\n- The Strait of Hormuz remained closed for weeks<\/li>\n
- Global shipping costs surged<\/li>\n
- Food and energy supply chains were disrupted<\/li>\n<\/ul>\n
Oil prices, while off their peaks, remain significantly higher than pre-war levels, indicating that supply-side pressures persist.<\/p>\n
Daniel Ivascyn of Pacific Investment Management Co. warned, \u201cThis is a legitimate inflation spike \u2014 markets are underestimating the tail risks.\u201d<\/em><\/p>\nThis creates a disconnect:
\n\ud83d\udc49 Markets are pricing peace
\ud83d\udc49 The economy is still absorbing the shock<\/p>\n
Bond Markets Signal Caution Even as Equities Rally<\/h2>\n
While equity markets are optimistic, bond markets are sending a more cautious signal.<\/p>\n
\n- Two-year US Treasury yields have risen sharply<\/li>\n
- UK gilt yields have climbed even higher<\/li>\n
- Rate cut expectations have been scaled back<\/li>\n<\/ul>\n
Before the conflict, markets were pricing multiple Federal Reserve rate cuts this year. Now, expectations have shifted to just one possible cut, with only a 60% probability.<\/p>\n
Andrew Chorlton of M&G Investments noted, \u201cThere is very little risk premium left in markets, despite clear inflation risks.\u201d<\/em><\/p>\nThis divergence suggests that fixed income markets are not fully buying the equity rally.<\/p>\n
Earnings Strength and AI Momentum Add Fuel to Rally<\/h2>\n
Beyond geopolitical optimism, fundamental drivers are also supporting markets.<\/p>\n
\n- US economic resilience remains intact<\/li>\n
- Corporate earnings expectations are improving<\/li>\n
- Artificial intelligence-driven demand continues to boost sentiment<\/li>\n<\/ul>\n
According to JPMorgan Asset Management, S&P 500 earnings growth forecasts for 2026 have been revised upward, with potential for double-digit expansion even if conflict-related disruptions persist.<\/p>\n
Emerging markets are also seeing strong upgrades, with profit estimates rising at their fastest pace since 2009.<\/p>\n
Here\u2019s What Happened This Week and Why Traders Reacted<\/h2>\n
What happened:<\/p>\n