Iran conflict: Are markets getting ahead of themselves?

Were markets wrong about a swift end to the Iran conflict?

Market recap

• Equity markets were mixed this week with volatility settling down, and equity investors seemingly putting the conflict in Iran behind them despite ongoing uncertainties.
• The S&P 500 rose 0.5%, with energy and technology leading the pack.
• The April mini-correction proved short-lived, and the index is again galloping along in record territory.

Iran

Last week, it appeared that a resolution to the Iran conflict could be on the horizon. Since then, however, peace efforts appear to have stalled and the Strait of Hormuz remains closed. Our evaluation is that markets are getting a bit complacent when it comes to pricing in conflict-related risk. It is like last year’s “Liberation Day” tariffs: markets initially expected worse, so as tariffs were gradually lowered, markets treated it as if the tariffs would disappear entirely. This wasn’t the case; the worst-case scenario was avoided, but some tariffs remained. Now, markets appear to be assuming that a resolution to the Iran conflict would mean that oil prices would quickly return to the pre-crisis status quo. That is not necessarily the case. Yes, we are most likely past the worst of the crisis. However, oil prices are likely to remain elevated for some time, in our view—and markets need to reflect that. For companies, input costs have risen, while for consumers, higher gas prices are a hit to the pocketbook. As we’ve noted previously, the economic fundamentals remain strong: employment data looks good, consumer confidence is relatively high, and there is still some relief on the horizon in the form of tax cuts, rebates, and potential interest rate cuts. However, we think markets may have gone too fast in reaching record highs.

Bottom line: Markets are likely to continue to move higher once the Iran conflict passes—but given the lingering uncertainty and likelihood of persistently elevated oil prices, they may have gotten ahead of themselves.

Earnings

Q1 earnings seasons is underway, with several market leaders in both Canada and the United States having already made their profit announcements. Overall, results have been very good across the board, which speaks to the strong economic fundamentals. Canadian consumers remain a bit weaker than their American counterparts, and companies in both countries are highlighting that the Iran conflict could represent a risk if it persists. Otherwise, however, there has been little in company guidance to make markets worry. Not all U.S. Financials got much of a boost from their strong results, though Citigroup, which posted an earnings beat,¹ was a notable exception. In their forward guidance, they did raise some concerns about the health of the consumer, but they have made similar comments previously and it has not affected their performance. Canadian banks also did well, and we are seeing a continuation of the positive momentum in the U.S. Tech space. Looking ahead, Canadian consumers will get a break at the pump as a result of the government’s temporary suspension of the fuel excise tax. The Canadian economy should also benefit from higher oil prices given the prominence of the Energy sector. And given companies’ strong earnings, we also expect to see higher yields and more dividend pickups.

Bottom line: While the U.S. economic outlook is rosier than Canada’s, earnings on both sides of the border remain strong.

The Fed

Last week, Kevin Warsh—President Trump’s nominee to succeed Jerome Powell as U.S. Federal Reserve Chair—answered questions from the Senate Banking Committee at his first confirmation hearing. The Trump administration’s decision on Friday to drop its criminal investigation into Powell potentially clears the way for Warsh to be confirmed sooner rather than later.² However, there were also some other important takeaways for markets coming out of the hearings, as Warsh indicated that a Fed under his leadership would be less transparent with markets than Powell and his other recent predecessors—potentially reversing a decades-long trend of more open communication. This could deny markets key information they use to determine valuations. In his testimony, Warsh played it close to the vest, being careful not to appear too closely aligned with Trump, nor too far removed. Based on his comments, however, our expectation is that the cadence of Fed communications to markets will remain largely unchanged, but he may be less open about his—and the Federal Open Market Committee’s—thinking, which markets have historically used to price in the chances of future interest rate cuts or hikes. Will he go as far as to eliminate the ‘dot plot,’ which shows the Fed’s interest rate projections over the next several years? That remains to be seen. But if it remains, our view is that it on its own provides enough information for markets to get a decent sense of the Fed’s thinking.

Bottom line: A Fed under Kevin Warsh may be less communicative than under other recent Chairs, but unless the dot plot is eliminated, we suspect markets will still have adequate information.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled From crisis to calibration: earnings anchor the next move

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Originally Posted April 27, 2026 – Iran conflict: Are markets getting ahead of themselves?