Written by Steve Andrews
Markets, War, and the Latest “Wall of Worry”
The war with Iran -- particularly its impact on energy prices -- has become the latest wall of worry for the U.S. economy. Yet nearly seven weeks into the conflict, the economy and corporate earnings remain resilient. Markets are not the economy. While the markets and the economy tend to be in synch over the longer term, short term volatility often reflects uncertainty rather than fundamentals, as geopolitical risks rattle investors’ nerves.
Market Volatility Gives Way to Relief
From the start of hostilities through March 30, the S&P 500 fell nearly 7.8%, only to recover those losses and regain its footing after avoiding the abyss of “Obliteration Day”-- the deadline for a threatened U.S. strike on Iran’s energy infrastructure. A global relief rally followed Pakistan’s brokering of a two week ceasefire to jump start peace talks. While the outcome remains uncertain, investors have shifted focus from existential risk back to the durable fundamentals of an American economy that refuses to buckle.
The Consumer Still Carries the Economy
U.S. growth remains heavily consumer driven. While $4 a gallon gasoline is clearly unwelcome, household finances are generally sound, supported by job growth, rising wages, and mostly healthy balance sheets. The March Employment Report showed a gain of 178,000 nonfarm payroll jobs -- more than triple expectations -- and reversed February’s revised decline. Private payrolls rose 186,000, and the Labor Department’s private sector diffusion index climbed to 56.8, signaling broad based hiring. The unemployment rate edged down to 4.3%, layoffs remained low, and average hourly earnings rose 3.5% year over year.
Inflation: Energy Concerns, Not a Structural Problem
March CPI rose 3.3% year over year, the highest since April 2024. In another era, this might have sparked a selloff. Instead, the bond market shrugged, attributing the increase largely to energy noise: a 21.2% surge in gasoline prices accounted for roughly 75% of the CPI move. Core CPI held steady at 2.6%, with 40% of CPI components -- including medical care and used cars --posting price declines. By contrast, Europe, lacking U.S. energy independence, faces mounting stagflation risks, with markets pricing a 75% probability of an ECB rate hike by year end.
Services Sector Powers Ahead
The U.S. services sector -- responsible for more than 80% of GDP growth -- remains firmly in expansion. The ISM Non Manufacturing Index stood at 54.0 in March, with forward looking components pointing to continued momentum. New Orders surged to 60.6, the strongest reading in over three years, while Business Activity registered a healthy 53.9.Manufacturing Recovery Continues
Manufacturing is also steadily improving. The ISM Manufacturing Index rose to 52.7, with Production climbing to a robust 55.1 and New Orders holding at 53.5 as order backlogs increased. S&P Global’s Manufacturing Index similarly rose to 52.3, driven by strengthening domestic demand. S&P Global characterized the data as evidence of “encouraging resilience” despite the war, noting that manufacturers expect any impact to be modest and short lived -- though uncertainty remains.
Sentiment Weakens, Spending Holds
Consumer sentiment has deteriorated further, according to both the University of Michigan and Conference Board surveys, widening the well known gap between sentiment and spending. Nevertheless, spending remains strong. Personal Spending and Retail Sales for February rose 3.7% year over year, while weekly Johnson Redbook data showed retail sales up 7.6% from the same week in April 2025.
Earnings Expectations Point to Low Recession Risk
Wall Street analysts are taking note of the economy’s resilience. While investors have wavered, consensus estimates for S&P 500 revenues and earnings in 2026 and 2027 continue to rise. Current forecasts call for EPS growth of over 19% this year and nearly 17% next year -- well above the long term average of 8.8%. While optimistic and subject to change, these projections imply very low odds of a recession over the next 18–24 months. Money center banks also report steady loan growth, suggesting no emerging credit crunch despite concerns around private credit.
Markets Reclaim Their Footing
By mid April, the S&P 500 had recovered from its March 30 low and now sits within inches of its all time high. While the Persian Gulf remains a source of risk, the fog of war may be lifting as truce talks continue. Markets are betting on a path toward resolution and a renewed focus on the resilient U.S. economy -- one increasingly supported by tech driven productivity gains spreading across traditional industries. Let’s hope they’re right.
