Living With War
Economic Growth Rebounds While Geopolitical Risks Increase Uncertainty
Growth appears to have rebounded after a spell of nasty weather slowed the economy in the first quarter. Nonetheless, the war with Iran elevated oil prices and uncertainty, so it would be reasonable to expect spending to moderate. Still, we do not see a recession on the horizon at this time. A recession is unlikely to be triggered without a sustained large increase in crude prices and a lengthier period of curtailed oil supplies. This remains only one possible outcome and it is not the most likely scenario. Will there be regime change in Iran or will the government remain in power, either still managed by Islamists or by a new group of leaders who wish to make peace with the West? These are dramatically different potential outcomes and any of them seems plausible right now.
Market Volatility Persists Despite Resilient Economic Data
Stock prices have been volatile in response to government policy statements and incoming war news, which isn’t surprising. The economic news is far clearer and better. Job growth rebounded in March and layoffs remain almost surprisingly low, as initial claims declined close to 200,000. Companies will start reporting first quarter earnings next week and estimates actually increased over the past three months. Still, we suspect the solid profit reports will have only a muted positive effect on share prices while attention remains focused on the war. But in our view, the market’s retreat should prove to be a good buying opportunity for investors looking beyond the current headlines.
S&P 500 Valuations Adjust Lower as Earnings Expectations Improve
The S&P 500 was trading around 22.0 times expected 2026 earnings at the beginning of the year, a level that was worrisome to some analysts who viewed this multiple as steep, even though it was heavily driven by several very large, rapidly growing technology firms. The war and surge in oil prices triggered a market decline, even as earnings estimates for the year increased since yearend from 12.8% to 13.2%. So, the market is currently priced at just 19.8 times expected 2026 earnings and even less excluding the Mag 7. Such market pricing would be considered quite attractive in a more peaceful environment. If this conflict ends anytime soon, it is our judgment that investors would jump back in aggressively, as we saw last Monday when it seemed like the fighting might end quickly.
“It is impossible to know if the worst of the market decline is behind us, but we think current valuations will be viewed as highly attractive as soon as the cannons stop shooting.”
CIO & Co-founder, Dr. Charles Lieberman
Investment Perspective: Navigating Uncertainty with a Long-Term Outlook
It is impossible to predict the end of the war with any confidence, but is that necessary to make sensible investment decisions? If the conflict ends before serious damage is done to spending and inflation, we would expect a rebound to new highs. There’s a quote attributable to Baron Rothschild more than a century ago: “Sell on the trumpets and buy on the cannons.” In other words, when everything is great and the trumpets are blaring, the news is very positive and stock valuations tend to be high. That’s a time to sell. But when the news is awful, the cannons are firing and knocking down the city’s walls, asset prices tend to be highly depressed, because people sell stuff regardless of valuations to get cash, and that’s a time to buy. It is impossible to know if the worst of the market decline is behind us, but we think current valuations will be viewed as highly attractive as soon as the cannons stop shooting.
Staying Flexible in Markets While Maintaining a Long-Term Strategy
Events are unfolding quickly, which is typical of military conflicts. And many aspects of the war will prove to be surprising. So, it is important to remain flexible. But at the same time, it is even more important to have a longer-term vision to guide any short-term tactical adjustments. Because we have that longer-term positive perspective, it suggests there may be opportunities to adjust tactically. We are following events very closely.