Taking Stock - The mystery of the record-breaking stock market

7 minute read

Who’d be an expert? Ask an energy or Middle East specialist at the beginning of the year what the effects of a sustained closure of the Strait of Hormuz would be on the oil price, the world economy and financial markets and chances are a US$200-US$250 per barrel oil price, a shrinking world economy and retreating stock markets would be the go-to answer.

That’s because a widely held view among energy and Middle East experts is that the Strait of Hormuz is the single biggest thing they worry about the most. Understandable given 20% of global oil supplies, or 20m barrels per day, passed through the strait pre-war.

And yet, with the strait effectively closed for two months and counting now, oil is way off the US$200-250 range (for now), although it is up to US$100-$110 having been US$70ish pre-war. In April, the IMF (International Monetary Fund) revised its growth forecast for the world economy down to 3.1% in 2026 compared to the 3.3% pre-war estimate. Not a substantial downgrade but this is based on the conflict being resolved within weeks and oil and gas production and exports normalising by the middle of the year (World Economic Outlook).

As for stock markets, well where to start? Not only have they largely recouped the losses suffered during the first month of the conflict, but in some cases (take a bow the US) they have set all-time highs.

So, what’s going on?

In Taking Stock Episode 63, James Hughes and I try to unpick the mystery of why stock markets are flying high while the Strait of Hormuz remains shut. Like all good mysteries, a good place to start is with a little scene-setting. In this case, by taking a closer look at oil prices.

The missing 10m

Now, a 50%+ increase in the oil price is nothing to be sniffed at, but arguably that’s a decent outcome considering 20% of global oil and gas supplies have effectively been stranded for over two months. A number of reasons lie behind the relative resilience shown. The Saudis making more use of their east-west pipeline to the Red Sea has restored 5m barrels a day of crude oil exports, according to the Financial Times. The International Energy Agency (IEA) has co-ordinated the largest release of strategic oil reserves in its history (400m barrels of oil). There has also been a degree of demand destruction, notably across Asia, via behavioural changes.

The result? About half of the lost 20m barrels a day of oil are getting back onto the market. The damage therefore hasn't been as big as feared. Caveat alert: the longer the conflict carries on, the greater the damage will be.

That leaves 10m barrels missing. For context, that’s the equivalent of two oil price shocks in the 1970s combined! 5m barrels of oil a day were lost in the 1973 and 1979 oil crises, according to IEA executive director Fatih Birol as reported in the Guardian. 10m is a significant number then. Certainly, not one that automatically screams record-breaking stock markets, which leads on to the big question.

Why have stock markets gone up?

Firstly, there is no shortage of reasons to explain why stock markets have fared better than expected: worst-case scenario oil prices have not come to pass; expectations that the conflict will prove to be short-lived; the TACO (Trump Always Chickens Out) trade; the ceasefire agreement and subsequent extension. But none of these are an excuse for stock markets to roar ahead. What is, however, is earnings growth upgrades. Analysts have been upgrading their earnings growth expectations…by a lot.

Take the US. Earnings for this year are currently expected to grow by over 20% year-on-year in 2026. Not only is this a large quantum but it represents a step-up on the 14% growth pencilled in at the start of the year. Despite the conflict then, analysts are expecting profits in the US to grow by more than they had forecast at the start of January. Furthermore, the earnings upgrades have outstripped the rise in markets, meaning valuation multiples have become cheaper. The price/earnings (P/E) multiple for the MSCI All Country World Index (ACWI) for example has fallen to 17.8 times from over 19 at the start of the year.

And if you look at the largest technology stocks, the MAG 7, they are the cheapest they've been for a long period of time—Microsoft and Nvidia are trading on cheaper valuations than the market even though they have superior growth rates. Rewind six months and US valuations were a major concern. The hope was earnings would grow into valuations. Six months on and this is what is happening.

It’s a similar story elsewhere. Thanks to oil and gas companies and defence names accounting for a large portion of the UK’s main stock market, earnings are now expected to grow by 14% in 2026 and 9% in 2027. In the Eurozone,15% earnings growth is expected this year and 12% next. Emerging markets top the lot, courtesy of a handful of high-flying tech companies including TSMC, Hynix, Samsung, Tencent and Alibaba—44% earnings per share growth is anticipated this year and 18% in 2027.

The long story short

The equity market may be up but not as much as expectations for earnings growth expectations. So, despite moving higher the market is cheaper than it was before the conflict. The enabler for the rally has been the consensus view that Trump is going to cut a deal to end the conflict and reopen the strait, feeding the narrative that the economic impact will be transitory. This in turn has allowed investors to get back to looking at fundamentals. And they like what they are seeing.

Transitory economic impact + earnings growth upgrades + cheaper valuations
= stock markets at or close to all-time highs

Stock markets then have been rising because that’s what they typically do when earnings are growing strongly and valuations are looking cheap. In the grand traditions of the good mystery, the big reveal here, it turns out, is that markets are behaving rationally.

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