What will the market do after the war is over?
The Trump administration’s decision to initiate a wide-scale military campaign against Iran, recently coined Operation Epic Fury, can be viewed through a number of lenses. Some might say the strikes have been framed by Washington as a multifaceted necessity for global and domestic security. Others may simply say, the justifications for the strikes keep changing.
Initially, the White House claimed an “imminent” nuclear threat, with President Trump saying Tehran was two weeks away from a breakout capacity that would have rendered future intervention impossible. This, despite Trump issuing a statement after the Operation Midnight Hammer strikes on Iran in June 2025 that the mission was a “spectacular military success” and that Iran’s key nuclear enrichment facilities had been “completely and totally obliterated.”
The administration then insisted Iran was actively rebuilding infrastructure destroyed during last June’s strikes. Later, officials pointed to the urgent need to dismantle Iran’s ballistic missile network, which they argue poses a direct threat to the American homeland and key European allies. Later again, Defence Secretary Pete Hegseth and Secretary of State Marco Rubio categorised the strikes as a pre-emptive measure to neutralise “terrorist armies” and ensure the total annihilation of the Iranian Navy, thereby securing the freedom of navigation in the Strait of Hormuz.
And during all of these rationalisations, the administration has also leaned into the humanitarian angle, describing the bombings as a catalyst for the Iranian people’s “hour of freedom.”
One can be pretty sure, it’s none of these.
Global markets are currently more focused on the realities of energy security and economic volatility. The mêlée has pushed oil prices to multi-year highs, prompting an emergency response from the International Energy Agency.
The 32-member body is expected to vote on a massive proposal to tap strategic petroleum reserves, following a G7 communiqué expressing readiness to stabilise the market. The proposed release of 300 million to 400 million barrels, which would dwarf the 240-million-barrel intervention seen after the 2022 invasion of Ukraine, would provide a 124-day supply buffer for oil currently trapped on the wrong side of the Strait of Hormuz.
The fragility of this economic environment was on full display this week as a social media post from U.S. Energy Secretary Chris Wright – claiming the U.S. Navy had successfully escorted a tanker through the Strait – caused a temporary drop in oil prices and a rally in stocks before a White House correction sent the stock market’s rally into reverse.
Despite the whiplash, the S&P 500 has shown resilience, amid hopes of another chapter of the “TACO” phenomenon, or “Trump Always Chickens Out.” That phrase was coined after Trump backed down from his Liberation Day tariffs in April last year when stocks and bonds moved undesirably. When the U.S. President commented to CBS News overnight that the war is almost “completely done”, investors interpreted it as a signal of de-escalation in response to falling stock prices and surging energy costs.
Trump’s kaleidoscopic rhetoric – shifting from demanding “unconditional surrender” to hints of a conclusion- fueled a two per cent rebound in the S&P 500 from its recent lows.
Now investors are trying to work out whether buying the dip makes sense. Could we see a repeat of the 2025 strategy, where buying the dip following a policy “back-off” resulted in a 24 per cent rally?
I’m not so sure. Remember, after all this is over, we still have the artificial intelligence (AI) bubble to contend with, a potential multi-trillion-dollar misallocation of resources and a conga line of issues.
- Persistent inflation: Even if oil prices retreat from conflict-driven spikes, the market will remain worried that higher energy prices have already fed into broader, long-term inflation that was not declining before the conflict began.
- Monetary policy and interest rates: The Federal Reserve (the Fed), the Reserve Bank of Australia (RBA) and other global central banks are focused on inflation risks, delaying any hoped-for rate cuts.
- Global economic growth: Concerns regarding slowing global growth, particularly in Europe and Asia, and a deteriorating employment picture in the U.S., are likely to re-emerge.
- Corporate earnings and AI valuations: Investors will return to questioning whether the high valuations for tech stocks, particularly those linked to massive AI capital expenditures (capex), are justified by earnings performance.
- Fiscal deficits and debt: Concerns about long-term government borrowing, debt levels, and the potential for higher taxes and higher long-duration interest rates will continue to weigh on investor sentiment.
- Finally, broader stock market valuations: Among many valuations that are stretched, the Shiller P/E at 39.21 times ten-year average earnings for the S&P500, remains higher than any level since 1870, with the exception of the tech bubble of 1999/2000. While that doesn’t mean the market is about to crash, history says investors buying at today’s levels are locking in low single digit returns for the next 5-10 years.
The path to a sustainable rebound remains clouded by factors beyond the Middle East conflict. Once geopolitical tensions subside, the market will return its focus to several pre-existing, fundamental economic concerns.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
