By Kyle Tetting
Two months into this prolonged conflict, it would be easy for investors to fixate on the uncertainty surrounding the war in Iran. Instead, markets appear to be looking past the near-term anxiety and focusing on the two drivers we’ve emphasized for years: earnings and interest rates.
The encouraging news is that earnings have remained strong while interest rates have been relatively stable. Without earnings growth, investors have little reason to pay more for stocks today than they did yesterday. At the same time, the interest rate environment directly influences how future earnings are valued, so stability in rates provides a clearer framework for assessing that growth.
Importantly, earnings forecasts entering this period were already robust. At the start of the year, Refinitiv projected first-quarter earnings growth of 14.4% year over year. A number that’s normally walked back only to be beaten when actual earnings are released held steady across the quarter. And as we work through the bulk of earnings releases, current results point to first-quarter growth of approximately 16.1%, far higher than lofty expectations.
While strong earnings validate prior optimism and help justify higher stock prices, they offer limited insight into what lies ahead. More encouraging has been the outlook: Projected earnings growth for 2026 now exceeds 20%, representing a more than 30% increase from forecasts just a few months ago.
That said, risks remain. Early earnings reports frequently cited the Iran conflict as a source of concern. For example, Equifax noted that higher rates and reduced mortgage activity — linked in part to geopolitical uncertainty — have made forward guidance more challenging. Meanwhile, companies in consumer goods and transportation have pointed to elevated oil and gas prices as potential headwinds to future growth.
Even in a favorable earnings environment, the impact of the Iran conflict is evident and likely to persist.
On the interest rate front, rising oil prices would typically introduce inflationary pressure. In theory, higher inflation leads to expectations of rising rates, as investors demand greater compensation and the Federal Reserve considers tightening policy.
In practice, while rates initially moved higher alongside oil prices, they have since stabilized some, albeit at higher levels. The reasons for this more muted response to inflation concerns are not entirely clear, but the result has been a calmer rate environment, allowing investors to remain focused on earnings.
The Federal Reserve decided to hold rates steady at its late-April meeting, which did little to disrupt this narrative, especially coupled with a somewhat divided outlook. If anything, the Fed signaled that the more likely path remains future rate cuts, an outcome generally supportive of higher stock prices.
If markets continue to be driven primarily by earnings and interest rates, the current backdrop remains constructive for stocks. However, uncertainty still looms large, particularly with markets trading near all-time highs. A cautiously optimistic stance appears warranted, though “cautiously” remains an important qualifier.
Encouragingly, balanced investors entered this volatile period from a position of strength and have benefited from diversification. By avoiding both the extremes of market highs and lows, they have experienced a more manageable path while still participating in many of the positive developments shaping today’s market.
Kyle Tetting is president of Landaas & Company, LLC.