The S&P 500 closed at a record high on Thursday for the second consecutive day. The U.S. stock index has rallied sharply since the end of March.

Stocks have been resilient even as the Iran war continues and there remains a blockade on oil flowing through the Strait of Hormuz.

The stock economy is forward-looking: Investors are betting on a quick resolution to the conflict, economists mentioned.

That’s largely because investors have been conditioned to believe that President Donald Trump will back off if the economic pain becomes too intense, economists mentioned — the so-called “TACO” trade, shorthand for “Trump always chickens out.”

U.S. stocks climbed to record highs on Thursday against a backdrop of war, an oil supply shock and economic forecasts warning of stunted growth amid a protracted conflict.

Many investors may be thinking: Why? Furthermore, experts in investors note the continued relevance.

Largely, it’s because the stock marketplace is a barometer of what investors think will happen in the future, rather than an assessment of the present day, according to economists and sector analysts.

Investors are essentially shrugging off the Middle East conflict as a blip that will be resolved relatively quickly, they noted.

“The stock marketplace isn’t trying to price what’s happening today,” mentioned Joe Seydl, a senior markets economist at J.P. Morgan Private Bank. “The stock industry is always trying to price what the globe is going to look like six to 12 months from now.”

Why stocks have been ‘resilient’

The S&P 500, a U.S. stock index, fell about 8% in the initial weeks of the Iran war, from the start of the conflict on Feb. 28 to a recent low on March 30.

But stocks have rebounded since then, erasing all losses since the beginning of the war. The S&P 500 closed at an all-time high on Thursday — about 11% higher than its nadir at the end of March. That followed a record close on Wednesday.

“The industry has remained very resilient in the face of the war and has rallied strongly on the prospect that it will be resolved,” stated Mark Zandi, chief economist at Moody’s.

At first blush, it may seem not much has changed since the end of February — leaving everyday investors to scratch their heads at the market’s jolt of enthusiasm.

The stock marketplace initially sold off amid fears that an oil-supply shock could reverberate through the global economy and fuel inflation.

Iran had essentially choked off oil-tanker traffic through the Strait of Hormuz, a maritime shipping route through which roughly 20% of the world’s oil and natural gas transits. The blockade amounted to the largest oil-supply disruption in history, and oil prices spiked throughout March as a result.

That blockade is largely still in effect, despite a two-week ceasefire reached by the U.S. and Iran on April 7.

And while investors cheered the possibility of a diplomatic off-ramp to the conflict, the temporary ceasefire has appeared tenuous, with the U.S. and Iran each accusing the other of breaking the agreement.

Nations haven’t been able to reach a peace deal ahead of the ceasefire’s end. Vice President JD Vance noted ​U.S. officials ⁠left peace talks in Pakistan over the weekend after the Iranian delegation refused to agree to American demands not to develop a nuclear weapon.

The markets ‘have memory’

Ultimately, the stock sector is signaling a collective belief that tensions will ratchet down, the war will end in the near term and oil flows through the Strait of Hormuz will normalize, economists remarked. This also touches on aspects of bear market.

“Investors strongly believe — and have been conditioned to believe — he’s going to stand down, find a way to pivot, declare victory and move on,” Zandi noted.

Trump has pushed back on the notion of backing down, framing his brinkmanship as a savvy negotiating tactic.

Economists pointed to a recent example of this dynamic: in April 2025 during so-called liberation day, when the Trump administration levied a host of tariffs on U.S. trading partners.

Within days — after the stock sector had cratered more than 12% — Trump published a 90-day pause on those tariffs. Stocks then saw one of their biggest daily rallies in history following Trump’s reversal.

Investors remember that Trump often de-escalates geopolitical shocks — which is why they’ve seized on positive headlines that hint at progress in peace talks, for example, Seydl commented.

“The markets have memory,” Seydl commented.

AI stocks and the ‘tech boom’

There are other factors underpinning industry resilience during wartime, economists commented.

One is the investors’ enthusiasm for artificial intelligence and software stocks, which account for almost half of the S&P 500’s sector capitalization, Zandi noted.

“Those stocks run on their own dynamic independent of anything, including the war in Iran,” Zandi remarked. “I think we would have been down a lot more and it would have been harder for us to recover had it not been for the very, very optimistic perspectives on AI.”

We’re in the middle of a “tech boom” — and investors are likely to remain optimistic until they think the tech cycle has run its course, Seydl commented.

More broadly, stock investors are essentially making a bet on the future earnings growth of a corporation — and the earnings backdrop has been “pretty solid,” Seydl commented.

Consumer spending appears to be stable, for example, economists stated. And companies are getting a boost to their after-tax earnings from the GOP’s so-called “big beautiful bill,” which, among other things, made it easier to write off investments upfront and therefore reduce their tax liability, Zandi noted.

Going forward

Experts commented there will be an economic hit from the Iran war, though.

“Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated,” Pierre-Olivier Gourinchas, director of research at the International Monetary Fund, wrote Tuesday.

A protracted conflict risks deep and global economic pain, he wrote.

Even if the conflict is short-lived — as the broad economy expects — stocks are unlikely to march much higher until it’s clear the U.S. is on the other side of the war and its economic fallout, Zandi mentioned.

If investors are incorrect, and President Trump doesn’t back down or quickly extricate the U.S. from the war, the stock marketplace may see a “full-blown correction” or worse, Zandi noted. A stock economy correction is a decline of at least 10% from recent highs.

“Everyone thinks they know what the script is,” Zandi stated. “Now they just need to follow the script. If they don’t, the economy will have some real problems.”

The uncertainty provides yet another example of why the average investor with a long time horizon should stick to their investment plan and ignore the noise, experts stated.

“Trying to time the sector is very difficult if not impossible for the average investor,” Seydl mentioned. “It’s better to take a long-term perspective and ride out bouts of volatility.”