S&P 500 Index: 8,000 or 6,000?
Although hostilities in the Middle East have largely subsided, the Strait of Hormuz remains closed. This is highly significant for oil prices. Supply is restricted, as approximately 20% of global oil and gas flows transit through the Strait of Hormuz, which has now been closed for some time. It is therefore understandable that oil prices initially fell sharply when fighting eased, only to rebound soon after. A similar pattern has been observed in helium and fertilizers.
What is notable, however, is that equity markets have largely shrugged off these rising prices, with the S&P 500 reaching new highs. This is counterintuitive, as economists argue that higher prices for oil, gas, helium, and fertilizers should lead to increased inflation, higher interest rates, and slower economic growth—factors that are typically negative for both corporate earnings and price-earnings ratios for shares.
Why, then, do equity markets continue to rise, and can this trend be sustained?
There are indeed several structural factors that have reduced the sensitivity of the economy to higher energy prices:
- The economy is less energy-intensive than it was a decade ago, meaning oil and gas account for a smaller share of total production costs.
- As oil and gas prices rise, the transition to alternative energy sources—such as nuclear, solar, and wind—accelerates.
- For the S&P 500, it is also relevant that the United States is largely self-sufficient in oil and gas.
However, these factors do not fully explain the phenomenon. Equity markets in other regions exhibit similar resilience, and the same logic does not apply to helium—critical for semiconductor production—or fertilizers.
More likely, the following dynamics are at play:
- Continued momentum in AI development is already driving strong earnings in the technology sector, with expectations of further growth.
- There is a broadly held assumption that Iran will not sustain its current stance for long and that the Strait of Hormuz will reopen in the near term, limiting the duration of any economic disruption.
That said, the AI narrative warrants some caution.
Significant capacity is currently being built, which is supporting elevated profitability. However, once this capacity is fully deployed, intense competition may emerge, particularly given the high fixed-cost base.
Moreover, expectations for AI may be overly optimistic. The technology remains prone to errors, can exhibit unpredictable behavior, and has unresolved negative externalities.
In addition, AI data centers are highly energy-intensive. While their energy mix is expected to shift increasingly toward nuclear, solar, and wind, dependence on oil and gas remains significant for now. As such, energy prices cannot rise too far without consequences. A similar vulnerability applies to helium, which is essential for chip manufacturing.
If we examine the implications of the closure of the Strait of Hormuz, the following can be observed:
- To date, the primary consequence has been an increase in oil prices. Equity markets appear to be pricing in a scenario where oil prices will not rise significantly further, which would only hold true if the Strait of Hormuz is reopened in the near term.
- If this does not occur, the global landscape is likely to change considerably. Significant physical shortages of oil, gas, helium, and fertilizers would emerge, potentially driving prices substantially higher. In addition, a shortage of fertilizers would lead to a marked decline in food production.
As noted, the prevailing expectation is that the Strait of Hormuz will reopen soon. However, this remains uncertain. From Iran’s negotiating perspective, there is currently limited incentive to concede quickly. Equity markets remain elevated, interest rates have not risen sharply, and recession risks are not yet fully priced in. As a result, the pressure on the United States and its allies to accommodate Iranian demands remains limited.
This situation could shift rapidly if physical shortages begin to materialize—a scenario that may be approaching. It is therefore plausible that Tehran will only engage in serious negotiations once prices rise further, interest rates increase, and equity markets come under pressure.
Read more on this and related topics in our latest Global Financial Markets Report
