The Strait of Hormuz Is Back Open. Is the Good News Already Priced in?

After a record-setting week with the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite hitting all-time highs, investors woke up to another pleasant surprise on Friday.

Israel and Lebanon agreed to a 10-day ceasefire yesterday, and in response, Iran said this morning that it was fully opening the Strait of Hormuz, a bottleneck in global energy shipping that had become the biggest economic pain point from the war, leading to soaring oil prices.

While Iran's foreign minister said that the Strait was "completely open," President Trump said he was continuing the blockade he announced on Monday in response to Iran's refusal to agree to peace terms.

Image source: Getty Images.

How markets are responding

All three major indexes were up more than 1% on the news as of 1:10 p.m. ET, with the S&P 500 gaining 1.2% but trailing the Dow Jones Industrial Average and the Nasdaq.

However, the Russell 2000 small-cap index was an even bigger winner, up 2.7%. That's a sign investors are getting more comfortable moving back into higher-risk stocks and also have increased confidence that inflation and, therefore, interest rates will be tamed. Yields on the 10-year Treasury note fell 1.4%, a good sign for stocks.

Oil prices plunged, meanwhile, with a barrel of Brent crude falling 10.3% to $81.74, the clearest sign today that the impact of the Iran war was unwinding, though that price is still about 20% higher than it was before the war started.

Can stocks keep climbing?

Assuming today's gains hold, they will mark the 13th gain in the last 14 sessions for the S&P 500, while the Nasdaq Composite has risen in the last 14 sessions straight.

The market's enthusiasm is understandable. After the war in Iran and the spike in oil prices that accompanied it threatened to derail the global economy, it now seems that the conflict has blown over with a ceasefire holding, and Iran agreeing to open the Strait.

Investors are eagerly looking past it, and U.S. bank CEOs have said the consumer remains strong, indicating that the jump in energy prices hasn't affected the economy.

However, stocks are still expensive with the S&P 500 trading at a price-to-earnings ratio of 28.

At that valuation, investors will need more good news to keep the rally going. With big tech earnings right around the corner, investor attention is likely to shift to quarterly profits from the "Magnificent Seven." If the tech titans deliver strong results, that could be the catalyst for another leg up for the S&P 500.

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.