Written by: invest wallstreet

As of Thursday's market close, driven by strong gains in technology stocks, the S&P 500 Index and the Nasdaq Composite Index surged to record highs against the backdrop of geopolitical wars in the Middle East, continuous shocks to oil supply, and economists warning that prolonged geopolitical conflicts would suppress economic growth.

The S&P 500 Index closed at an all-time high for two consecutive days on Thursday, with an increase of up to 11% since the end of March. The Nasdaq 100 Index, which covers the world's leading tech companies and is known as the "barometer of tech stocks," has seen 12 consecutive days of gains, marking its longest streak since July 2017. Although this geopolitical war in Iran has not been officially declared over and oil transportation in the Strait of Hormuz remains effectively blocked, global stock markets, including those in the US, have maintained a strong upward resilience.

Despite the ongoing geopolitical storm in the Middle East, Wall Street's bullish sentiment towards the global stock markets has grown increasingly fervent. After experiencing a series of sharp sell-offs initially, institutional investors on Wall Street seem to be filtering out the noises related to the war, no longer viewing the conflict as a "core variable determining market direction" as they did in early March, but instead largely "ignoring the sounds of conflict."

Many financial giants on Wall Street directly attribute the current resilience of the stock market to sustained upward revisions in corporate earnings expectations, particularly those related to the robust demand for AI computing infrastructure that has not been interrupted by the war.

Many investors may wonder: why is the stock market able to set new record highs during the conflict in Iran? Economists and market analysts generally state that it's largely because the stock market serves as a barometer of investors' views on what is likely to happen in the future, rather than a precise pricing and assessment of the current situation. They point out that investors essentially perceive the Middle Eastern geopolitical conflict as a temporary episode that will likely be resolved relatively quickly, and thus they are not overly concerned.

Additionally, another major trend supporting the rebound in global stock markets is the growing belief that Trump might "back down" when faced with significant matters—meaning that as important deadlines approach, he would ultimately choose to retreat, leading to a significant rebound in the market, known as the "TACO" strategy.

The "TACO" strategy (Trump Always Chickens Out) has been widely adopted by traders and is currently the hottest trading strategy. Whenever Trump issues new and more aggressive tariff threats or raises other significant threats that trigger market declines, global equity and bond market investors bet that he will ultimately back down or that the actual policies will be significantly less stringent than his verbal threats, leading them to make large bets on the stock market rebounding significantly soon.

As the earnings season officially kicks off this week, with strong growth expectations around AI computing infrastructure providing support, and with the market increasingly believing that Israel and Iran, as well as Lebanon, will soon reach a long-term stable ceasefire under domestic pressures, top Wall Street investment firms, including BlackRock, Goldman Sachs, and Morgan Stanley, have become marginally more optimistic about the future of the stock market, highlighting that the large financial institutions of Wall Street view the recovery of market valuations post-truce between Israel and Iran, the strong profitability of companies, and the upward revisions in tech companies driven by the AI computing supply chain, as the basis for a significant warming of market risk appetite.

Joe Seydl, a senior market economist at JPMorgan Private Bank, stated: "The stock market is not trying to price in everything that is happening today." "The stock market is always trying to price in what the world will look like in 6 to 12 months from now."

Why does the stock market exhibit "resilience"? One answer is the increasingly strong profitability displayed by companies during earnings season.

In the view of Mark Hackett, Chief Market Strategist at Nationwide, institutional investors on Wall Street are the core driving force behind this stock market recovery. After experiencing aggressive sell-offs, market attention has shifted back to the fundamentals of companies during earnings season, which he believes are quite supportive.

Top traders on Wall Street currently remain indifferent to the negative situation in the Middle East, choosing to continue to allocate to equity assets; institutional investors can be seen as the core driving force behind the recovery of the US stock market. These institutions appear to believe that the impact of the Middle East is more like a manageable oil price disturbance, rather than evolving into a systemic supply crisis, asserting that as long as the conflict does not undermine American corporate profitability, does not send oil prices permanently into an uncontrollable range, and does not compel the Federal Reserve to become fully hawkish, the disruption to the stock market is only temporary.

The S&P 500 Index, one of the benchmark indices of the US stock market, fell about 8% during the first few weeks after the conflict in Iran began, from February 28 to the recent low on March 30.

However, since then, global stock markets, including those in the US, have recorded a strong rebound, erasing all losses since the war began, with the stock markets of South Korea, Taiwan, and China's A-shares, which hold the world's leading AI computing industry leaders, showing particularly strong gains since April. The S&P 500 Index closed at a historical high on Thursday, approximately 11% above the recent low at the end of March. Previously, this index also set a record closing high on Wednesday.

Mark Zandi, Chief Economist at Moody's, one of the three major credit rating agencies, stated: "In the face of this war, the market has always behaved very resiliently, and it has strongly risen on expectations that geopolitical issues will be resolved."

At first glance, not much seems to have changed since the end of February—this has left ordinary investors feeling perplexed by the sudden enthusiasm in the market.

The initial sell-off in the stock market occurred because investors were concerned that the oil supply shock could transmit through the global economy, raising inflation, potentially leading to a situation of "stagflation" that would frighten central banks.

Iran is still continuing to cut off tanker transportation through the Strait of Hormuz, a maritime shipping route through which approximately 20%-30% of the world's oil and natural gas is transported. This blockade constitutes the largest oil supply disruption in history, leading to oil prices soaring throughout March and causing market stagflation expectations to rise significantly.

Although the US and Iran reached a two-week ceasefire agreement on April 7, the blockade remains largely in effect.

Moreover, even though investors are cheering for the potential diplomatic de-escalation or even a long-term ceasefire path, this temporary truce appears fragile, with both the US and Iran accusing each other of violating the agreement.

In the brief two-week ceasefire period, no parties have managed to reach a long-term peace agreement. US Vice President JD Vance stated that US officials left peace negotiations held in Pakistan last weekend after the Iranian delegation refused to accept the US demand to not develop nuclear weapons. Nevertheless, from the strong trend in the global stock market, the market increasingly believes that Israel and Iran, alongside Lebanon, will soon reach a long-term stable ceasefire under domestic livelihood pressures.

From the "TACO strategy" to the expansion of strong profits driven by AI technology: two core pillars behind the record highs in the US stock market during a geopolitical storm.

Economists generally state that, ultimately, the stock market conveys a collective belief: tensions will ease overall, the war will come to an end soon, oil transportation through the Strait of Hormuz will eventually return to normal, and the world will search for ways to obtain energy while avoiding the Strait of Hormuz after a long-term peace agreement is reached, much like Europe is gradually stabilizing its exit from Russian oil and gas.

Economists believe this is largely because investors have been "trained for the long term" to increasingly believe that when economic pain becomes too intense, President Donald Trump will back down—this is the so-called "TACO" trading strategy, which stands for "Trump always chickens out."

The increasingly popular trading strategy on Wall Street—TACO (Trump Always Chickens Out)—emerged in April 2025, during Trump's unprecedented "reciprocal tariff" campaign against global trade partners. At that time, traders bet that either the US government would retract its tariff threats, or that even if implemented, they would be much less severe than what Trump threatened and would not significantly hinder US economic expansion.

The term TACO was coined by a columnist from the Financial Times to describe how Trump swings back and forth on tariff issues following his "Liberation Day" speech on April 2, 2025, but ultimately he would choose to back down, leading to a major rebound in the stock market. When asked about "TACO" at a press conference, Trump angrily called the question "malicious."

The "TACO" strategy has now been widely adopted by traders and is currently the hottest trading strategy. Whenever Trump issues new and more aggressive tariff threats or raises other significant threats that cause market declines, global equity and bond market investors bet that he will ultimately back down or that the actual policies will be significantly less stringent than his verbal threats, leading them to make large bets on the stock market rebounding significantly soon.

Zandi stated: "Investors strongly believe—and have been trained to increasingly believe—that he will retreat, that he will find a way to transition smoothly, and then declare victory and move forward."

Trump has repeatedly refuted claims that he would back down, describing this edge-pressuring strategy as a sophisticated negotiation tactic that he leads.

Economists point to a recent example of this dynamic: the so-called "Liberation Day" in April 2025, when the Trump administration imposed a series of tariffs on US trade partners globally; just a few days later—following a more than 12% drop in the US stock market—Trump announced a 90-day suspension of the tariffs. Subsequently, after a significant reversal in Trump's tariff policy stance, the global stock market experienced one of the largest single-day increases in history.

Seydl states that investors remember how Trump often allows geopolitical shocks and tariff shocks to significantly cool down—which is why they seize on any headlines suggesting positive progress in peace negotiations. "The market has a memory," Seydl said.

Economists generally agree that other important factors also support market resilience during wartime. "One important factor is that investors are filled with enthusiasm and confidence in the strong profitability trajectory of tech companies driven by the AI computing spending wave, and these tech stocks account for nearly half of the total market capitalization of the S&P 500 Index," Zandi states.

The strong profit expectations trajectory driven by the AI technology boom is also the core logic driving the record highs of the US stock market and the strong rebound of global stock markets.

Stocks with the label "profit certainty + high beta attributes," which are directly related to AI computing infrastructure—namely, Nvidia, TSMC, AMD, and Broadcom, leading the "AI computing superstars"—are often the most sensitive, quickest to move, and have the largest upward trajectories in the logic of the overall stock market or tech stock rebound. The underlying logic is extremely "hardcore": this layer is directly tied to the record-high AI capital expenditures of tech giants, rather than simply telling a story. AI hyperscalers (such as Google, Microsoft, and Amazon) continue the arms race of capital expenditure, and as long as they are "more willing to borrow and lay off employees, rather than withdrawing from the AI capex race" (the so-called "AI computing arms race"), the leaders of the entire AI computing supply chain still have allocation value.

Therefore, BlackRock has upgraded the rating of US stocks and emerging market stocks to "overweight" and noted that the profit growth expectation for the tech sector in 2026 has increased to 43%; Citigroup has also upgraded US stocks to "overweight," believing that the recent market valuations after a pullback have become more attractive and that US technology's contribution to global profit growth continues to rise.

Stock strategists at BlackRock, the largest asset management firm on Wall Street, have shifted back to "overweight" American and emerging market equity assets, primarily because they believe that the substantial damage inflicted by the new round of Middle Eastern geopolitical conflicts on global economic growth "is likely to be very manageable." In terms of core investment themes/market trends, BlackRock strategists are focusing on semiconductor stocks closely related to AI computing infrastructure, such as the leaders in the AI computing supply chain in the US stock market and those in South Korea and Taiwan.

BlackRock emphasizes the forthcoming earnings season for US stocks, proclaiming that profit growth engines can sustain the main theme of the US stock bull market. The strategists wrote: "Even during geopolitical conflicts, corporate earnings expectations continue to rise, with most logic and reasons arising from the strong AI computing demand brought by AI-related investment themes."

Zandi stated: "These stocks have their own operational logic, independent of anything else, including the war in Iran." "I believe that if it weren't for the market having a very optimistic bullish sentiment towards the AI super wave, we would have dropped more, and the recovery would have been more difficult."

Seydl mentioned that we are in a round of "AI-driven technology boom," and investors are likely to remain optimistic until they believe this technology cycle has reached its end. More broadly, stock investors are essentially betting on an increasingly strong profit growth trajectory for companies, and the current earnings backdrop "has been quite solid," Seydl stated.

For example, economists note that consumer spending seems to remain stable. Zandi stated that companies' after-tax profits are also getting a strong boost from the Republican so-called "Big and Beautiful Act," which, among other things, allows companies to more easily expense investments in the current period, thereby reducing their tax burden.

The market has begun to envision a new round of "super bull market" for stocks.

The strong new highs established by the stock market during the geopolitical conflict also highlight why ordinary investors with a long-term investment horizon should stick to their investment plans and ignore the noise.

Seydl stated: "For ordinary investors, trying to time the market is very difficult, if not impossible." "A better approach is to take a long-term investment perspective and ride through any rounds of severe volatility."

The reason the stock market seems to have "forgotten the war" is not because it is ignoring geopolitical risks, but because the stock market trades on the performance growth trajectory for the next 6 to 12 months, demonstrating strong profitability resilience and policy backing expectations; in contrast, the global bond market is still more directly driven by inflation expectations and interest rate paths corresponding to rising oil prices.

With tech stocks leading a strong rebound in global stock markets—especially with the S&P 500 Index and the Nasdaq Index continuing to set historical highs during the geopolitical conflict—investors can be seen as sounding the new round of global stock market "bull march."

Tom Lee, a seasoned stock market strategist known as the "Wall Street oracle" and co-founder of Fundstrat, believes that the current position of the US stock market, as well as that of the global stock markets, is stronger than when it reached its previous historical high earlier this year. Lee agrees with a typical judgment from Wall Street financial giant JPMorgan, noting that the tech sector centered on AI computing infrastructure must lead the rising theme of the next super bull market; Citigroup has upgraded US stock ratings from "neutral" to "overweight," predicting that the S&P 500 Index will reach 7,700 points by the end of the year. As of Thursday's close, the S&P 500 Index stood at 7,041.28 points.

The current narrative of a new bull market is essentially supported by three major logics: the resilience of corporate earnings displayed in the latest earnings season, the new wave of risk appetite led by tech stocks/AI computing themes, and the market's judgment that the Middle Eastern impacts will not evolve into a long-term inflation crisis like in 2022. As long as these three pillars of logic remain intact, Wall Street will continue to treat headlines related to the war as trading noise.

Citigroup's latest research report indicates that the tech sector, previously suppressed by geopolitical conflicts, valuation anxieties, and overly high expectations, is now entering a window of transition from risk appetite repair to fundamental reassessment. After a marginal cooling of the situation in Iran, the market rapidly shifted from safe havens back to risk assets, with the S&P 500 and Nasdaq strengthening in tandem, indicating that funds have begun to re-trade the "overall profit growth trajectory driven by AI" rather than "current panic." Within this framework, tech stocks, especially large tech platforms, have transitioned from merely liquidity-driven group investment targets to become the core anchor for US stock risk appetite and profit expectations.

Citigroup's strategist team emphasizes that the market is transitioning from a narrow bull market led by a few AI leaders to a broader rising pattern "spreading from points to areas," but this requires two conditions to be simultaneously met: first, tech leaders must continue to prove that high valuations are not bubbles through profits and guidance; second, geopolitical risks must continue to evolve in a predictable and manageable direction. Once these two conditions are satisfied, the market will gradually spread from a few weighted tech stocks to a broader spectrum of software, communication services, and even cyclical sectors across industries, forming a "market breadth improvement bull market" that may appear this summer.

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