Oil drops, stocks soar to wrap up a wild week. What just happened in markets?

By John Towfighi, CNN

New York (CNN) — For most of the past week, markets have traded as though the war with Iran were already over. The S&P 500 just hit its third-straight record high and the Nasdaq Composite is on its longest winning streak since 1992.

The stock market’s exuberance is rooted in optimism about ceasefires in the Middle East and hope that oil might resume flowing through the Strait of Hormuz. There’s an assumption that the worst of the oil disruption might be in the past and the conflict will remain contained, helping lessen the global economic fallout and leaving central banks more equipped to cushion any damage.

Wall Street’s fortunes have changed in recent weeks as the United States and Iran have entered a ceasefire and oil prices have pulled back from trading above $100 per barrel. Oil prices plunged and stocks soared Friday after the Iranian foreign minister announced the Strait of Hormuz would be “completely open” for commercial transit during the remainder of the ceasefire.

Brent crude, the global oil benchmark, fell 9.07% to settle at $90.38 per barrel, its lowest level since March 10. The Dow soared 869 points, or 1.79%, recouping all of its losses since the war with Iran began.

President Donald Trump on Thursday said Israel and Lebanon agreed to a 10-day ceasefire. While uncertainty remains about the duration and outcome of the war, as well as the fate of the Strait of Hormuz, with Trump saying the US naval blockade will remain in place, the stock market is looking past it all.

The S&P 500 just had its best week since May, continuing a remarkable weekslong surge. The benchmark index has soared more than 12% since its recent nadir on March 30, recovering its Iran war-related losses and then building on gains.

The stock market’s buoyancy can be pinned to relief about the ceasefire, the pullback in oil prices, strong forecasts for earnings season and a recent rebound in tech stocks.

“The bar for positive surprises was reset lower, and the market and investors were braced for oil prices to be at higher levels than they are now,” Keith Lerner, chief market strategist at Truist Advisory Services, told CNN.

“Even though there’s not full clarity at this point, there’s a pathway, or some credible signals, that we’re moving towards this de-escalation,” he said. “That little bit of good news has gone a long way.”

The ferocious rally this month can also be explained in part by technical factors. The sharp rebound has been boosted by market action such as “forced buying,” where algorithms automatically snap up stocks when measures of volatility decline to a certain level.

And the market’s relentless push higher is in part a feature, not a bug, of how the US stock market has moved in the past year. Wall Street traders have been conditioned to buy the dip on hopes that Trump will pull back from his most risky decisions if the markets fall, serving as a guardrail and a signal to buy.

The war with Iran has complicated that strategy, as Trump can’t just walk away, or TACO, if the Iranians decide to hold their line and keep the strait closed. Nonetheless, Trump has delivered messages across the past few weeks that hostilities are nearing an end, including backing off strikes on Iran.

Whether traders truly believe it’s the end to the conflict or not, it’s proven a lucrative opportunity to buy the dip and take part in the rally.

“It’s momentum,” said Steve Sosnick, chief strategist at Interactive Brokers. “At this point, it’s almost a feeding frenzy. No one wants to be left out. FOMO is a weird thing, because you know that the F is clearly ‘fear,’ but it’s really ‘greed.’”

“Even if things get moving, there’s production capacity that’s been destroyed,” Sosnick said. “Yet, the market’s decided that … we’re all fine.”

CNN’s Fear and Greed Index, a proxy for market sentiment, tumbled into “extreme fear” in March before rebounding sharply and trading in “greed” on Friday. While oil prices remain above pre-war levels, stock market traders are piling into riskier bets.

Wall Street is also in the midst of corporate earnings season. About 10% of companies in the S&P 500 have reported, and 88% have delivered positive surprises on earnings per share, a measure of profitability. Corporate America continues to broadly deliver robust revenue, helping drive the market higher.

Moreover, for six months, sentiment around AI was souring. Now, things are turning around, with renewed confidence that there is strong demand for computing power and lots of room to run in the massive data center buildout. That’s helping drive markets higher, with the Nasdaq hitting its first record high since late October.

The S&P 500 closed above 7,100 points for the first time ever Friday after closing above 7,000 for the first time on Wednesday. The market’s swift recovery from its lows might be overlooking risks, said Kristina Hooper, chief market strategist at Man Group.

“The stock market clearly has a desire, almost a gravitational pull upwards, and it’s willing to look through any kind of negative data or developments, and seize on that which appears positive, or the kernels of positive data and development, and move higher,” Hooper said.

“Affordability is becoming a bigger issue every day that gas prices are higher for consumers,” Hooper said. “We’re just seeing that chasm widening between Main Street and Wall Street.”

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