Market Volatility Amid Iran Conflict
Recently, the market has been quite unstable, largely due to the ongoing war in Iran. As of late March, the S&P 500 was sitting roughly 9% below its all-time high. While this doesn’t quite fit the standard definition of a market correction, many investors might feel it’s close enough.
So, is there more turbulence on the horizon? History might offer some clues, and while nothing is guaranteed, the outlook may be somewhat reassuring for investors.
Key Insights
- Typically, a 10% market correction happens around once a year, and U.S. stocks tend to face a downturn of over 20% every six years.
- Economic adjustments can happen whether the economy is thriving or in distress, while bear markets usually arise only during recessions, falling earnings, or significant events.
- Strong earnings growth generally helps shield against stock market crashes.
- Anticipated growth in S&P 500 earnings is expected to reach double digits within the next couple of years.
Historical Context on Earnings and Market Stability
In the short term, stock prices fluctuate for various reasons, but over the long haul, market performance is largely tied to profit growth. If profits are steadily increasing, potential declines for companies are likely to be limited.
Let’s take a closer look at the recent market correction, where stock prices dipped but profits continued to rise.
| Year | S&P 500 EPS Growth Rate | Market Event |
|---|---|---|
| 1994 | +39.8% | 9% rebound in first half |
| 1997 | +2.6% | 10% revision at year-end |
| 1999 | +27.7% | 12% adjustment in second half |
| 2004 | +20.1% | 8% mid-year rebound |
| 2011 | +12.4% | 19% correction, near bear market |
| 2018 | +20.5% | 20% revision in Q4 |
Data from various sources suggest that despite signs of a bear market, gains have typically been recouped fairly quickly. For example:
- In 2011, the market hit a low in October and reached new heights by February 2012.
- In 2018, it bottomed out in December and rebounded to an all-time high by April 2019.
This suggests that while adjustments may happen when earnings are growing, they’re usually moderate. Even during more significant corrections, markets often rebound relatively fast.
Now, what happens in the event of a more serious bear market?
| Year | Event | Outcome |
|---|---|---|
| 2000-2002 | Tech Bubble | Revenue dropped 51% in 2001; S&P 500 fell 49% |
| 2007-2009 | Housing Crisis | Profits fell 19% in 2007 and 77% in 2008; S&P 500 dropped 51% |
| 2020 | COVID-19 Pandemic | Profits dropped 32%; S&P 500 fell 32% |
| 2022 | Inflation Spike | Profits fell by 13%; S&P 500 decreased 24% |
Given this, if earnings start to decline or a recession hits, we could realistically expect stocks to plunge into a deeper bear market.
Will the S&P 500 Face a Crash in 2026?
Current projections suggest that S&P 500 earnings might grow at a rate of 17% in both 2026 and 2027.
If these forecasts hold up, they would lend strong support to the notion that a crash in 2026 is unlikely.
But the ongoing war in Iran demonstrates that situations can shift rapidly. So, if the unexpected happens and profits dip below estimates, remaining cautious would be wise.
