Stocks Are Soaring. Is Wall Street Underestimating the Iran Energy Shock?

After the war in Iran weighed on stocks for nearly the entire month of March, major indexes are suddenly soaring.

The S&P 500 (SNPINDEX: ^GSPC) just posted its 10th gain in the last 11 sessions, and the Nasdaq Composite is up for the last 11 straight sessions. Both indexes set new all-time highs on Wednesday.

Investor sentiment has suddenly turned positive as the risks from the Iran war seem to have significantly faded following the announcement of a ceasefire and President Trump's commentary, indicating that the war is nearly over.

The war was a shock to markets, and investors have good reason to celebrate its prospective end, but there's a thornier issue at hand than just the geopolitical implications of the war. Energy prices remain elevated, and they seem to be decoupling from the war negotiations and the stock market.

Image source: Getty Images.

The energy question

A barrel of Brent crude closed at $91.15 on Wednesday, which was down from its recent peak near $120, but up 36% from where it was before the war began.

While the ceasefire has held, the Strait of Hormuz, the key passageway for much of the Middle East's oil and gas, is still seeing limited traffic after the U.S. blockaded it on Monday, and its future is uncertain.

In addition to the risk around the Strait, there's also been significant damage to energy infrastructure that will take time and money to repair.

According to an estimate from Rystad Energy, there is at least $50 billion in damage, but the effect on production could be even more severe, meaning higher oil prices could last well beyond the war, assuming it ends soon.

What it means for investors

The relief rally of the last two weeks has certainly been rewarding to investors, with the Nasdaq jumping 16% from its low point on March 30.

However, the volatility wrought by the war isn't necessarily over, given the uncertainty of the situation in Iran and what's likely to be a longer-lasting impact on energy prices.

For investors, there's no need to change your strategy here. In fact, the sharp rebound shows why it makes sense to hold through volatility and not try to time the market.

It's impossible to predict what will impact the stock market next, and sentiment could shift again sooner than you think. Still, investors shouldn't count out the impact of higher energy prices as that's likely to factor into stock prices at some point.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.