In the midst of the US-Iran conflict, why are US stocks more resilient than other global markets? An analysis in one article

China Financial News Network, March 24 (Editor: Bian Chun) Amid global market turmoil triggered by the Iran conflict, even though U.S. stocks also recorded declines, they clearly outperformed other major global stock markets.

Since late February, when the U.S. and Israel launched military strikes against Iran, the U.S. benchmark equity indicator, the S&P 500, has fallen 4%. In the same period, Europe’s STOXX 600 index plunged 9%, Japan’s Nikkei index crashed by more than 12%, while iShares ETFs tracking non-U.S. equity markets fell by more than 8%.

“The U.S. may be able to withstand economic shocks better than other regions, so I expect U.S. stocks to perform better,” said Yung-Yu Ma, Chief Investment Strategy Officer at PNC Financial Services. But he also cautioned that, “(U.S. stocks) are only doing better right now because the decline has been smaller… so the pain is still there.”

After U.S. President Trump said on Monday that dialogue with Iran has been productive, global stock markets broadly rebounded, highlighting how extremely sensitive markets are to developments in the Middle East.

More Resilient to Energy Price Shocks

For why U.S. stocks have been relatively more resilient amid the fighting in Iran, investors pointed to multiple supporting factors, the main reason being that regions outside the U.S. are viewed as more susceptible to energy price shocks stemming from the war.

The U.S. economy has shifted from manufacturing to being more service-based, and its energy sources are more diversified, reducing its reliance on oil. Since the outbreak of the war, international oil prices have surged by more than 30%.

In a report, Monica Guerra, Head of Policy and Geostrategy at Morgan Stanley Wealth Management, noted that compared with 1980, the amount of oil the U.S. needs today to produce the same scale of GDP has decreased by 70%.

From the supply side, the U.S. is currently the world’s largest oil producer and net exporter. A report from BlackRock Investment Research last week said that although about one-fifth of the world’s oil needs to be transported through the Strait of Hormuz (with shipping through the strait having stalled), only about 4%-8% of U.S. oil is transported through the strait.

“At least on the supply side, we (the U.S.) are more resilient than other developed countries,” said Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute. “The market is worried that other parts of the world, given their high reliance on Persian Gulf oil supplies, could face supply shortages.”

Higher Weight in Tech Stocks

Another key factor is that technology and related stocks have higher weightings in U.S. stock indexes—these stocks are generally considered to be more resistant to economic shocks.

Since the outbreak of the war, the S&P 500 technology sector has fallen by less than 2%. Tech stocks make up about one-third of the weight in the S&P 500 index, while in iShares global equity ETFs excluding U.S. stocks, the tech sector’s weight is only 16.5%.

“The overall business model of technology companies will not be severely affected by fluctuations in oil prices,” said PNC’s Yung-Yu Ma.

Stronger U.S. Dollar

Some investors believe that the stronger U.S. dollar is also supporting the U.S. stock market. Since the outbreak of the war, the dollar versus a basket of currencies has risen by about 1.5%.

“In the early stage of this conflict, the dollar was already identified as one of the hedging winners,” said Nate Thooft, Chief Investment Officer of Equities and Multi-Asset Solutions at Manulife Investment Management. After the fighting broke out, his company cut its risk exposure to non–U.S.-dollar-denominated stocks to guard against downside risks.

“A large amount of capital has flowed into European markets,” said Jack Janasiewicz, Chief Portfolio Strategy Officer at Natixis Investment ⁠Managers Solutions. This makes European markets more vulnerable to shocks from “de-risking.” “To me, U.S. stocks are more like a risk-hedging trade, and that’s probably why they’ve performed better.”

If the Fighting Ends Quickly, International Markets May Reclaim Their Advantage

Investors point out that if the fighting ends quickly and the market environment before the conflict returns, this would mean international stock markets could regain their advantage.

Before the conflict broke out, Chris Fasciano, Chief Market Strategist at Commonwealth Financial Network, had believed that some European countries’ stocks are attractive because valuations are compelling and profit outlooks are improving. Based on data from LSEG Datastream, Europe’s STOXX 600 index’s 12-month forward price-to-earnings ratio is about 15x, while the S&P 500 index is about 21x.

“If the situation is resolved in the coming weeks or months, I still hope to allocate to international equities and believe they will return to being a set of quality asset classes worth holding,” Fasciano said. “But for now, the situation is changing by the minute.”

Tim Hayes, Chief Global Strategist at Ned Davis Research, said that if the war drags on and the global risk of “stagflation”—that is, high inflation alongside economic stagnation—worsens, it would be especially damaging to asset prices, making the higher valuations of U.S. stocks potentially more fragile.

A review by RBC Capital Markets of recent corporate commentary shows: “Companies keep sending investors signals that the U.S. is relatively more resilient, and this confidence also supports the resilience of U.S. stocks.”

RBC’s report released last Friday said: “Companies generally believe the near-term conflict is controllable, but if the fighting continues too long, there are still many uncertainties.”

(China Financial News Network, Bian Chun)