LIVE MARKETS-US stocks' reaction so far to conflict shows desire to "look through it"

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US STOCKS' REACTION SO FAR TO CONFLICT SHOWS DESIRE TO "LOOK THROUGH IT"

The S&P 500's .SPX reaction to the war in the Middle East this week has been muted compared with other risk assets, signaling a desire to look "through" the immediate news, Barclays equity strategists write in a note Wednesday.

"In contrast to the violent moves in commodities, the initial reaction in U.S. equities was relatively muted. This is likely because in recent years, particularly after the U.S. became a net oil exporter, equity investors have tended to look through geopolitical turbulence toward what is typically a rapid normalization in risk," they write.

The S&P 500 closed nearly flat on Monday and was down 0.9% on Tuesday, with the index cutting sharp early losses both days, while oil prices spiked higher. On Wednesday, the index is up 0.9% after a report that Iranian operatives secretively reached out to the U.S. to pursue talks to end the conflict and President Donald Trump said the U.S. Navy could begin escorting oil tankers through the Strait of Hormuz if necessary.

The S&P 500 has tended to register positive monthly returns following geopolitical risk spikes that occurred simultaneously with oil price spikes since 2020, they say.

Consumer discretionary, technology, utilities and materials tended to outperform the S&P 500 in the 12 months following the geopolitical risk peak, while telecom, energy and industrials tended to lag, they note.

"Among long-only style indices, bond proxies, high yield and value typically delivered the best excess returns over the same time frame," the strategists write, noting that the returns reflect macro headwinds "directly linked to episodes of prolonged geopolitical instability in some cases but tangential to them in others..."

Even before the U.S. and Israeli strikes on Iran, money managers had been de-risking portfolios as concerns about artificial intelligence disruption and private credit mounting, they note.

As for energy, they say the sector remains "the clear leader" in its analyses, with the Middle East conflict now likely putting a floor under Energy stocks for the time being, with positioning that could continue fueling the trade." Energy is followed by industrials and materials in leading sectors.

Energy has had $5 billion in inflows over the last four weeks and $9 billion for the year to date, a sharp reversal from the nearly $40 billion that flowed out of sectoral funds over the three years that ended December 2025, they write.

"As for how long the sector is likely to continue outperforming the S&P 500, we would watch for a repricing of the forward strip to signal expectations of persistent tightness in oil markets... This was the case in 2022 and 2023."

The United States, as a net energy exporter, is likely more insulated to an oil price shock compared to the rest of the world. Also, U.S. equities have less exposure to overseas revenues relative to their global counterparts, "which should help shield against some economic spillover effects."

The S&P 500 energy sector .SPNY is down on Wednesday while oil prices are up slightly.

(Caroline Valetkevitch)

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