Good morning investors,
The first trading day since war broke out in the Middle East delivered exactly the pattern I outlined yesterday morning. The S&P 500 opened sharply lower, dropped hard in the first hour, and then spent the rest of the session clawing back losses to close essentially flat, up 0.04%. The Nasdaq gained 0.4%. The Dow lost 0.2%.
This market has a standard operating procedure for seemingly large problems: acknowledge them, reprice risk briefly, then effectively move on unless the fundamentals change. Up until now, that approach has been vindicated. The problems have, in fact, mostly gone away.
Today is testing that thesis harder. Futures are down sharply this morning as the conflict spreads and the timeline extends. President Trump warned that military operations could continue well beyond the four weeks initially estimated. The US embassy in Riyadh was struck by drones overnight. Iran reportedly closed the Strait of Hormuz with warnings to set ablaze any vessels attempting transit. Six US service members have been confirmed killed in action.
My deepest respect goes to the American heroes who have given their lives serving their country.
Opening Bell
Futures are under significant pressure this morning as geopolitical anxiety intensifies. Dow ($DIA ( ▲ 1.19% )) futures are down 977 points or roughly 2%, S&P 500 ($SPY ( ▼ 0.07% )) futures are lower by 2%, and Nasdaq 100 ($QQQ ( ▲ 1.19% )) futures are off 2.5%. This is a meaningful escalation from yesterday's contained reaction.
Oil is surging again with Brent crude jumping 9% and WTI gaining more than 8%. The Strait of Hormuz closure threat is the key variable. Approximately 20 million barrels of petroleum products transit that waterway daily. If that chokepoint remains blocked for any extended period, this moves from risk premium to genuine supply shock. Goldman Sachs estimates European natural gas prices could more than double if the Strait remains closed for a month.
Gold futures are higher on safe haven demand, though spot prices have pulled back slightly. The dollar is firm. Treasury yields are rising as traders contemplate inflation risk from sustained energy disruption, pushing back expectations for Fed rate cuts.
Today's earnings calendar features Target ($TGT ( ▼ 0.18% )) and CrowdStrike ($CRWD ( ▲ 0.17% )) as the headliners, both of which carry significance beyond the individual companies. Target will tell us about consumer health under new CEO Michael Fiddelke. CrowdStrike will provide a read on cybersecurity demand at a moment when cyber threats from state actors are likely escalating.
The Market's Monday Comeback
Yesterday's intraday reversal was remarkable. The S&P 500 fell hard at the open but recovered everything by noon and closed slightly green. That is the market telling you it is not ready to price in worst-case outcomes yet. Investors chose to wait and see rather than panic.
The sector rotation was textbook. Energy and defense stocks caught bids. Exxon climbed on the heightened value of oil. Lockheed Martin rose more than 2% on expectations of prolonged conflict. Gold continued its historic rally, briefly crossing $5,400 an ounce. JPMorgan analysts expect a risk premium jump of 5-10% in the near term.
On the other side, travel stocks got hit. Delta and United dropped more than 2% as airports clogged with passengers scrambling to escape the region and airlines halted Middle East routes. Homebuyers also lost as mortgage rates jumped alongside Treasury yields.
The pattern from yesterday is consistent with historical precedent. Markets reprice uncertainty aggressively in the first move, then recalibrate once the actual economic transmission channels become clearer. The question is whether today's escalation changes that calculus.
Here is a great chart by Matt Cerminaro
Israel Bets on a Brighter Future
One of the more striking market signals came from Tel Aviv. Israel's TA-125 index surged more than 4.6% to hit a record high on Monday. That pushed its year-to-date return above 14% and its 12-month gain above 66%.
Global investors are effectively signaling that the current escalation, while volatile, could ultimately reduce Iran's threat and influence in the region long-term. Any muting or replacement of the existing Iranian regime would remove a geopolitical cloud that has loomed over Israel for decades. The sector leaders tell the story: financials, defense, and energy are driving the advance, each pointing to improving capital flows, stability, and domestic demand.
Wars are destructive in the near term, but they can also clarify long-standing uncertainties. Israel's stock market has traded with a persistent geopolitical discount tied to its proximity to a well-armed adversary with nuclear ambitions. The rally suggests markets expect that dynamic to change.
Oil: Risk Premium or Supply Shock?
This remains the central question for the macro picture.
Oil jumped almost 8% on Monday with Brent briefly topping $82 before moderating below $78. The surge marked the highest single-day jump in four years. Today it is moving higher again on the Strait of Hormuz closure reports.
The distinction between risk premium and supply shock matters enormously. Unless exports, shipping lanes, or Gulf infrastructure take a sustained hit, this does not automatically become a new $100 oil regime. US crude fair value sits around $67 a barrel. For prices to sustain materially above that level would likely require more than uncertain headlines. Inventories remain robust, the physical market is still fairly well supplied, and the futures curve does not yet suggest structural scarcity months out.
Gasoline prices rose to just under $3 on Monday. Drivers can expect steeper increases as disruptions filter through to retail stations. Analysts predict prices could rise $0.10 to $0.30 per gallon this week, with the spring driving season's seasonal shift to cleaner, more expensive blends adding additional pressure.
CrowdStrike: The Cybersecurity Moment
CrowdStrike reports after the close today, and the timing could not be more relevant. With state-sponsored cyber threats almost certainly escalating alongside kinetic military operations, the demand picture for best-in-class security platforms is likely strengthening.
Wall Street expects fourth-quarter adjusted EPS of $1.10, up from $1.03 a year earlier, with sales projected to rise 23% to $1.3 billion. The stock is down 18% year-to-date, caught up in the broader software selloff despite being a beneficiary of AI proliferation rather than a victim.
CEO George Kurtz addressed the AI disruption narrative directly in a recent LinkedIn post: "AI is powerful. It's transformative. And it absolutely makes security better. But AI doesn't eliminate the need for security. It increases it." He was responding to the stock's 8% decline after Anthropic released a code-scanning tool that some interpreted as threatening security incumbents.
The reality is more nuanced. AI makes software more secure in some dimensions while opening massive new attack surfaces in others. Every AI agent deployed creates new endpoints requiring protection. Every agentic system with privileges over private data becomes subject to prompt injection attacks. The companies solving for digital trust in an AI world are not threatened by AI. They are defined by it.
With war in the Middle East, there will likely be even more need for cybersecurity in the coming months. CrowdStrike and Palo Alto continue to be the two names I favor in this space.
Target: Testing New Leadership
Target reports this morning under new CEO Michael Fiddelke, the company veteran who stepped into the role in February. Wall Street expects EPS of $2.16 and revenue of $30.48 billion, both below year-ago levels. The company has already affirmed guidance for a low single-digit sales decline in the fourth quarter.
I have been critical of Target's CEO choice. Fiddelke was heavily involved in past leadership decisions that contributed to the company's current challenges. Annual sales have been roughly flat for four years after the pandemic surge, and the company is trying to turn around several years of disappointing results driven by a mix of company missteps and economic factors.
The investor meeting at headquarters today will lay out Fiddelke's strategy. I am watching closely for any sign of genuine turnaround thinking rather than more of the same. Sometimes leadership transitions create fresh perspectives. Other times they perpetuate the problems. The market will render its verdict quickly.
Nvidia Expands Supply Chain
Nvidia announced $4 billion in investments across photonics makers Lumentum and Coherent, $2 billion in each company. Photonics technology uses light rather than electrical signals to transmit data, enabling faster and more efficient transmission critical to data centers and advanced networking infrastructure.
The investment aligns with Nvidia's strategic goal of supporting domestic suppliers and comes amid the broader national push to strengthen US supply chains. Shares in both companies rose on the news. This is Nvidia extending its ecosystem rather than just selling chips, building the infrastructure layers that make its products more valuable.
Final Thought
Things will continue to be volatile, but I see this as a buy-the-dip moment in the market, especially if we head lower than the premarket is indicating.
Conflict creates uncertainty, but history is consistent on what happens next. The S&P 500 has averaged a 14.2% return in the 12 months following major conflicts since 1950. Median six-month gains after major geopolitical shocks exceed 5% since World War II. Markets tend to recalibrate quickly once it becomes clear that fundamentals have not materially changed.
The key variable remains oil. If this stays a risk premium event, the market will adapt the way it usually does. If it becomes a genuine supply shock through sustained Strait of Hormuz closure, that changes the macro conversation in a more durable way. For now, the market is worried but not yet convinced that the barrels stop flowing permanently.
Sentiment remains defensive. AAII bears outnumber bulls for the second straight week. Short interest in software is at historic levels. Institutions have posted record equity outflows. This is what crowded caution looks like, not complacency. From a contrarian perspective, that is constructive.
I continue to believe this bull market is alive. Earnings estimates are still moving higher. The spring is coiling. Stay systematic, stay objective. The data matters more than the noise.
As always, feel free to reach out with questions about positioning for these evolving market dynamics.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.