MONTHLY MARKET MUSINGS

April 2026

March Madness

With the Iran war and geopolitical tensions taking center stage in March, negative sentiment was re-invigorated leading to unsettled financial markets and increased volatility. The result is the S&P 500 Index falling from its earlier peak this year and settling approximately 9% lower, near what is often deemed correction territory. Meanwhile, the Dow Jones Industrial Average and the Nasdaq Composite Index did fall into correction territory.[1] Although the underlying market and economic environment remain on solid ground, the conflict has caused investors to try and price in the immediate risks of the situation and attempt to decipher the potential range of outcomes that could arise.

Using history as a guide, we can build a framework to try and understand how this situation could unfold. The most relevant comparison would be the Gulf War and Iraq’s invasion of Kuwait in the early 1990s. What we experienced then were markets which sold off sharply due to the uncertainty, rising oil prices, and concerns that it could escalate into a much larger regional conflict. During that time, the S&P 500 declined by about 18% as the worst-case scenarios were price into equities.[2] With the start of Operation Desert Shield and then Operation Desert Storm, it became more apparent that the conflict would potentially be short-lived, and markets began to look past it and bounce back. After only a few months, the markets recovered from the initial downturn and resumed the longer-term trend. Often, equities begin the recovery process not when the conflict has officially concluded, but as the overall uncertainty begins to diminish and confidence in economic outlooks begins to grow once again. This highlights an important dynamic that we have previously pointed to which is that markets tend to bottom out not when the news and headlines are at their worst, but when uncertainty begins to dissipate. Investors shift from letting emotions (fear and panic) drive their investment decisions to a more constructive rational approach with the longer-term picture in mind. This suggests that if the current Iran conflict mirrors past events and is short-lived with no major spillover, then the economic and financial market impact would likely be contained and transitory. Energy prices would come back down from their highs and stabilize shortly after, and any supply chain disruptions would be temporary. In this case, corporate earnings would likely be, by and large, mostly unaffected within the current fiscal year. While the war has pressured stock prices, earnings estimates have remained resilient. Some analysts have pointed out that as of the end of March, the forward price-to-earnings (P/E) ratio on the S&P 500 has contracted more percentage-wise than the price decline in the index from its peak.[3] This indicates that the current valuation contraction stemming from the market drop is mostly fear-induced as investors seek safe havens and shift temporarily to risk-off positions, rather than a fundamentally driven revision to earnings estimates. Outside of the directly affected industries, is it possible that the Iran war impacts the overall earnings outlook for the broad market? Unfortunately, yes. This could occur if the war were to drag on and create longer-lasting inflation via higher energy prices, among other things, and cause corporate profit margins to narrow. It would also hurt consumers directly as prices around them would increase leaving them with less disposable income.

Taking a look at the less favorable scenario where the conflict becomes prolonged, where the Strait of Hormuz remains obstructed (approximately 20% of the world's oil supply passes through the Strait of Hormuz[4]) and/or where the conflict escalates within the region, the economic implications would be more significant in this setting. Should this happen, we would expect oil prices to remain elevated given the constraint on global supply and continued disruptions to global trade. As noted, this would trigger higher inflation for an extended period, weigh negatively on consumer confidence, and put downward pressure on overall global GDP growth. In that environment, corporate earnings would likely contract as input costs rise and demand softens. While this is not the most likely outcome, it remains a risk and is reason for much of the heightened volatility we are experiencing.

With this backdrop, it is important to recall that market corrections are common and can be helpful to investors. In a strong market environment, pullbacks of 5%-10% are not only an opportunity to add to positions at a cheaper valuation, but it can also draw out some of the negative sentiment that overhangs the market and creates a resistance to the bullish trend. This can be seen as similar to when you are driving on Highway 401, and someone is in the left lane slowing down traffic. Once they finally move out of the way, the traffic can pick back up to a more consistent flow at a faster pace. These corrections can also help re-establish equity valuations which can better support long-term investment outcomes and growth by offering investors a better sense of risk/reward. The emotional reactions to negative market movements often cause investors to disregard their longer-term objectives to minimize the immediate pain and once that discomfort subsides the market recovers swiftly as they revert to those long-established goals. This is a primary reason that recoveries off the bottom during market turmoil tend to be sharp and nearly impossible to time. This was the case during the Gulf War as a substantial portion of the market’s gains happened in a relatively brief amount of time when the sentiment shifted. Investors who had moved to cash during that downturn found themselves missing the rebound and struggling to time the re-entry. As previously mentioned, this has an outsized impact on returns over time. Tax implications should also always be considered during market pullbacks if liquidating stocks is being contemplated. By selling equities in a taxable account capital gains taxes can be triggered which immediately reduces the amount of capital available to reinvest once the market settles. Eventually, this can result in a drag on overall returns, as a portion of the available capital is, effectively, no longer working for the investor. This can substantially reduce overall long-term returns when compared to staying invested and deferring the tax obligation. Investors often make this mistake and exchange a temporary unrealized drop in value for a permanent tax bill.

History has consistently shown that the equity markets have always been resilient regardless of the event transpiring. Geo-political conflicts, financial crises, or even economic recessions have all been met with strong recoveries which often happen in a quicker manner than is expected. Given this, the current volatility should be perceived more as part of a regular pattern that has happened repeatedly rather than an exceptional event. As we have noted above, if the conflict proves to be short-lived, like the Gulf War, then the negative market impact will fade away relatively quickly. A prolonged conflict would result in greater challenges but the lessons from history remain valid. Discipline and a focus on the long term will position investors in the best conceivable way to benefit from the market’s eventual recovery.

JAY SMITH, CIM®, FCSI®

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA®
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com