Markets Tune Out Iran War Noise, Reach New Highs

Major U.S. equity indices advanced for the week, with the NASDAQ (+2.4%) leading the S&P 500 (+1.4%) and the Dow Jones Industrial Average (+0.9%). All three finished at all-time highs, extending year-to-date gains to 16.3%, 11.1%, and 6.9%, respectively. The NASDAQ’s outperformance reflects tech and semiconductor names reclaiming market leadership, while the S&P 500’s equal-weight version lagged its cap-weighted counterpart – a sign the rally was concentrated among the Index’s largest constituents.

Bonds rallied alongside equities last week. The Bloomberg U.S. Aggregate Bond Index gained 0.8% for the week, consistent with a modest decline in Treasury yields. Gold also advanced 0.8%, benefiting from residual safe-haven demand amid lingering geopolitical uncertainty. April core PCE, the Fed’s preferred inflation measure, increased 3.3% year-over-year, in line with estimates. Inflation has trended up over the past year, however. The lowest core PCE reading over recent years was +2.6% last April.

Geopolitics continued to dominate headlines, though equities proved remarkably adept at tuning out the noise. Over the preceding weekend, the President announced a draft framework for end-of-war talks was “near finalization,” with terms structured around Iran reopening the Strait of Hormuz in exchange for the U.S. lifting its naval blockade. Within 24 hours, the President reversed, saying he was “in no rush” and instructing his team not to be pressured into a deal. Iran’s key demands – unfreezing an estimated $100 billion in overseas assets and limiting restrictions on its nuclear program – remained unresolved. Despite the whiplash, stocks rallied. Economically sensitive small caps led the charge (Russell 2000 +1.8%, Russell Microcap +2.1%) on Tuesday, suggesting investors were pricing in eventual resolution. Energy (ticker: XLE) fell 2.8% on Tuesday as crude softened on the prospect of the Strait reopening. Reports of a 60-day ceasefire extension were released Thursday, further advancing markets. Though the waterway remains closed, WTI crude (the US benchmark) settled near $88/bbl to end the week.

Continuation of AI strength ultimately drove markets higher. Memory chipmaker Micron Technology (ticker: MU) surged 19% on Tuesday (+27% on the week), crossing the $1 trillion market cap threshold for the first time. The move reflected surging demand for high-bandwidth memory – the chips that allow AI processors to access data at the speeds required for large-scale model training and inference. This demand tailwind extends beyond Micron. Samsung and SK Hynix, Micron’s two largest global competitors, drove meaningful gains in the MSCI Emerging Markets Index. SK Hynix’s market capitalization also passed $1 trillion last week.

Looking ahead, markets will be watching whether the U.S. and Iran can convert their fragile framework into a binding agreement. On Friday, the President indicated he would make a “final determination” on the conflict but did not specify a timeline.

On the valuation front, the S&P 500 trades at roughly 21.4x forward earnings versus a 10-year average of 19.2x, appearing stretched at first glance. However, the aggregate earnings of S&P 500 constituents are expected to grow nearly 20% over the next 12 months, following 19% growth over the last 12. Investors who rotate into other asset classes, such as fixed income, purely on valuation concerns risk missing substantial upside if those growth estimates hold. Valuations remain a poor market timing tool.