Celebrating the "end of war," markets pop the champagne early? Analysts warn: tail risks remain significant.

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Wall Street is front-running a war that is not yet over.

On Friday, April 17 local time, Iran announced the reopening of the Strait of Hormuz to commercial shipping. Combined with news of a ceasefire between Israel and Hezbollah in Lebanon, risk-on sentiment swept through global markets.

The S&P 500 closed up 1.2%, setting a new all-time closing high for the third consecutive trading day; the Nasdaq rose for the 13th straight trading day, tying the longest winning streak since 1992; the Dow rallied 1.8%, fully recovering all losses since the onset of the conflict.

The S&P 500 has gained 9% so far this month, marking the largest monthly increase since 2020. From the March lows to record highs, it took the S&P only three weeks to rebound. According to Asym 500's Rocky Fishman, this is the fastest such rebound of this magnitude on record.

Meanwhile, the US dollar erased all wartime gains during the session, and WTI crude oil futures plummeted by over 11% in a single day.

However, several market participants have warned that this celebration is built on a shaky foundation. According to reports, the "reopening" referred to by Iranian Foreign Minister Araqchi actually means that commercial vessels still need to "coordinate" with Iran before passage, which is obviously different from the market’s interpretation of "completely free passage." Trump also stated that the US will maintain a naval blockade of the Strait of Hormuz until a final agreement with Iran is reached.

Stocks: Front-running sentiment dominates, fundamentals provide support

The market's rapid rebound partly stems from a fear of missing out.

According to Bloomberg, last year after Trump sharply rolled back tariffs, markets experienced a swift rebound that caught many short sellers off guard. This time, traders have chosen to bet ahead of a full recovery, even though supply chains, energy infrastructure, and consumer confidence have yet to be materially restored. Commodity trading advisors (CTAs) who had been shorting stocks were forced to go long and chase the rally.

However, the rebound is not driven solely by sentiment. The resilience of the US economy, better-than-expected earnings, and enthusiasm for AI demand have provided independent upward momentum. According to Marcella Chow, global market strategist at J.P. Morgan Asset Management, the 2026 S&P 500 earnings growth forecast has been raised by nearly three percentage points. She stated: "Even if conflict-related factors reduce EPS growth to the mid-single digits, there is still the potential for double-digit earnings growth."

Goldman Sachs chief equity strategist Chris Hussey noted, three key risks weighing on the market have eased in stages this week: expectations for an energy crisis have softened, stress in the private credit market has not increased further, and AI disruption risks have diverged.

The "Magnificent 7" tech stocks have not seen a single down day since March 27, gaining about 19% in that time. This week, Tesla is up about 15%, Microsoft up 14%. Benefiting from the oil price crash, airline and cruise stocks led the S&P 500—Royal Caribbean Cruises jumped 7.34%, United Airlines rose over 7%.

Oil: Futures plunge, but physical market has not normalized

Among all assets in this rebound, oil prices show the biggest gap between market optimism and physical reality.

WTI crude oil futures fell more than 11% on Friday in a single day, down over 13% for the week, dropping to their lowest since March 10, and fell below the 50-day moving average for the first time since early January. US crude has now erased about 70% of the gains since the conflict began.

But according to Bloomberg, physical crude oil prices remain high, reflecting real issues such as disrupted shipping routes, high tanker freight rates, and depleted inventories. Analysts think it will take several weeks or even months to normalize these problems.

Wellington Management portfolio manager Brij Khurana put it succinctly: "Oil price trends dictate interest rate trends. It's as simple as that." He added that lower oil prices will be transmitted to inflation expectations, making yields likely to "gradually decline before summer."

Bonds: Rate cut expectations surge, but short-term rates remain cautious

The plunge in oil prices has directly boosted rate cut expectations.

Interest rate futures show the probability of at least one Fed rate cut this year soared from about 30% the previous trading day to 70%. The yield on the 10-year US Treasury fell 7 basis points to 4.24%, the largest one-day drop since March 30; the 2-year yield fell 7 basis points to 3.70%, below the federal funds rate of 3.75%, for the first time in over a month.

But overall, the bond market remains cautious. According to Bloomberg, Andrew Chorlton, chief investment officer for fixed income at M&G Investments, said: "There is almost no pricing for risk outside the short end of the yield curve. Inflation expectations one or two years out—no risk premium is being priced in right now."

Since the start of the war, the 2-year US Treasury yield has risen about 30 basis points, while the UK 2-year gilt yield rose about 60 basis points in the same period. Before the outbreak, traders had expected multiple Fed rate cuts this year, but now put the probability of just one cut at around 60%.

TD Securities’ head of US rates strategy, Gennadiy Goldberg, remains cautious: "All this shows that the market is highly sensitive to Middle East developments. Many investors will remain on the sidelines to see whether the progress is sustainable or reverses over the weekend."

Dollar: Intraday erasure of wartime gains, but rebound narrows

The dollar index showed a V-shaped trend on Friday, plunging more than 0.6% intraday to a seven-week low, then rebounding to close little changed from Thursday’s New York close.

According to reports, hedge funds have aggressively built short positions in the dollar. Conversa strategist George Vessey analyzed: "Dollar weakness is mainly because markets are pricing out geopolitical risk premiums, but this is not the start of a structural dollar depreciation. The Fed’s next move remains uncertain, inflation data is above expectations, and the economy is still resilient."

BofA's cross-market risk indicator—a composite measure of global equity, rates, currency, and commodity volatility—is on track this month for its second-fastest monthly drop on record, second only to the recovery stage at the onset of the pandemic.

Risks: Markets Pricing "War is Over" But Core Issues Unresolved

Several market participants have warned about the current optimism.

Sarah Bianchi, former trade official at Evercore ISI, wrote: "The Iran crisis seems to be heading for a tentative and fragile solution—even if a deal is reached, numerous core issues will remain unresolved."

PIMCO Group CIO Daniel Ivascyn stated: "The market sees gradual de-escalation as the most likely outcome, but the tail risks are enormous. This is a real inflation shock."

Laura Cooper, head of macro credit at Nuveen, who manages $1.4 trillion in assets, was even more direct: "The real market mispricing is treating this conflict as already over, when the underlying fragilities remain."

Goldman Sachs liquidity strategist John Flood also noted that CTAs bought about $33 billion in S&P positions this week, but the fastest buying phase has passed. He said: "The market is now prepared for a pullback next week."

Historically, the market’s tendency to downplay geopolitical events has almost always been proven right—the day the Russia-Ukraine conflict broke out, global stocks fell only 0.6%. But, according to Bloomberg, Arkevium founder Maxence Visseau pointed out that there have been two exceptions, both during periods of sustained oil supply disruption: 1973 and 1990. Whether this conflict will join that short list will depend on developments in the coming weeks.

Risk warning and disclaimerMarkets have risks, investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account a particular user's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article apply to their particular circumstances. You invest at your own risk. ```