The market in early April presented a fascinating split: the Strait of Hormuz situation hasn't fully settled, oil prices remain elevated, but the market's focus has quietly shifted. Investors' eyes have moved from the Middle East battlefield to the upcoming dense earnings reports.
This is not random mood swings, but a traceable narrative shift.
How Much Has the Market Actually Fallen, and How Much Has Oil Risen?
To understand desensitization, we need a baseline.
Goldman Sachs looked back at four historical oil price shocks—1974, 1980, 1990, and 2022. The S&P 500's median decline during oil price surges was 12%, and the full peak-to-trough decline averaged 23%. The mildest, the Iranian Revolution, still ended with a 17% drawdown.
This time: oil prices had already risen about 68% from before the war, a magnitude comparable to the 2022 Russia-Ukraine war—which ultimately produced a 25% full drawdown. But the S&P 500's peak-to-trough decline from its January high to mid-March was only about 4%. The supply shock magnitude is historically comparable, but the market reaction is far below the historical average. That gap is the most direct data proof of desensitization.
By end-March, the S&P 500 was down about 9% from its January record, with the Dow and Nasdaq both in technical correction. For March, the S&P 500 fell about 2.1%, Nasdaq about 3.4%, and the VIX averaged 24.3, up from February's 16.1 but still far below levels seen in major historical crises.
Entering April, the rebound accelerated on ceasefire news. The relief rally recouped more than two-thirds of the wartime losses, with the S&P 500 briefly returning to within 1% of pre-war levels. On April 13, it closed at 6,886, its highest since the war began, fully erasing wartime losses.
The Real Mechanism of Desensitization
Behind the data, market resilience has its own logic—not just emotional numbness.
First, fear has been priced once. In the early days of the war, the market completed a concentrated risk repricing. Once the worst-case scenario was digested, the marginal impact of subsequent bad news naturally diminished. In March, on days when Brent crude rose more than 2%, the S&P 500 fell, with a correlation coefficient of about -0.71. But this linkage began to loosen in early April—oil remained high, but stocks no longer moved in lockstep.
Second, energy stocks formed a structural hedge. Among March's best performers, Raytheon Technologies rose 22%, Lockheed Martin 19%, and ExxonMobil 16%, with the latter adding about USD 52 billion in market cap in a single month. The strong performance of energy and defense sectors significantly buffered the downward pressure from other sectors at the index level. While the war pushed up inflation risks, it also directly lifted earnings expectations for energy companies, creating a natural internal buffer at the index level.
Third, historical experience gave institutional investors confidence to hold. Morgan Stanley cited 75 years of data showing the S&P 500 averages an 8.4% gain in the 12 months after a major external shock. UBS also found that when the S&P 500 falls 5% to 10% over three to four weeks, it typically recovers to above pre-conflict levels six months later. This historical pattern led institutions to stay put during sharp declines rather than flee with the herd.
Fourth, the market believes political logic will produce an "exit." Barclays noted that further de-escalation remains the most rational outcome because the Trump administration faces rising political and economic costs and needs an exit. This judgment of game logic formed an important psychological foundation for stocks to remain relatively stable despite high oil prices.
Earnings: The Market's New Anchor
As war narratives temporarily recede, earnings season conveniently takes over. The earnings data itself provides enough attraction. For Q1 2026, the S&P 500 earnings growth consensus is about 12% year-over-year, marking the sixth consecutive quarter of double-digit growth. Citi's quantitative macro model shows that based on a consensus oil price of USD 71, there is still USD 2-3 of upside to Q1 EPS, with beats supported by models, not just optimism. Looking ahead, Q2 to Q4 growth expectations are around 20%, 22%, and 20%, respectively. More notably, Citi tracks that the full-year 2026 S&P 500 earnings consensus has been revised up from USD 312 at the start of the year to about USD 324—despite the Iran conflict and oil spike, analysts have not cut but consistently raised estimates. This itself is the confidence foundation for the market to pivot to the earnings narrative. Looking at estimate revision trends from March 2025 to March 2026, the proportion of S&P 500 components with upward earnings and sales revisions has been above the 20-year average in most months, especially since July 2025, when the expansion of upward revisions accelerated, indicating that the pace of fundamental improvement is quickening. Additionally, the Iran conflict has not yet materially impacted Q1 earnings numbers. The war only broke out in late February, so it had little real impact on most of Q1 operations. The upcoming earnings will likely still reflect the strong pre-war fundamentals. This time lag objectively gives the market a window to temporarily set aside the war variable and focus on earnings numbers.
Earnings Divergence: Not a Broad Rally, but Tech and Energy Carrying the Load
However, the index-level resilience masks an important internal structure: this earnings growth is highly concentrated and uneven.
Citi notes that on a full-year basis, the only sectors with upward earnings revisions are tech, energy, and materials. Consumer discretionary, consumer staples, healthcare, and industrials all face downward revision pressure. Tech and semiconductors are expected to contribute about 53% of total S&P 500 earnings growth, with high visibility driven by the AI capex cycle.
But this concentration also brings structural fragility. When investors see the index P/E falling, they may mistakenly think "valuations are getting cheaper," but the cheapness relies almost entirely on continued tech and semiconductor beats. Citi specifically notes that the semiconductor sector's forward P/E has compressed about 6 percentage points since the start of the year, and 10 percentage points since end-Q3 2025—meaning even if earnings expectations rise, stock prices may not keep rising, as interest rates and market sentiment can become the dominant variables at any time.
Once the tech sector sees earnings volatility, the entire index's earnings and valuations will face rapidly amplified knock-on effects. Meanwhile, the positive contribution from energy also has limits: if high oil prices persist and suppress consumption, its net contribution to overall earnings will actually diminish.
The 2022 Mirror: How Oil Prices Slowly Transmit to Corporate Earnings
To understand the current situation, the 2022 transmission path offers the most direct historical reference.
That year, oil prices peaked quickly in early 2022, but the full deterioration in corporate earnings took a full year. The transmission chain was clear: energy price surge → inflation expectations spike → market expects aggressive Fed rate hikes → consumer spending pressured → GDP growth slows → labor market weakens → earnings expectations for almost all non-energy sectors slashed. Materials briefly benefited but quickly gave back all gains as oil fell.
Citi's comparative analysis suggests that current inflation and interest rate pressures have not reached the extreme levels of 2022, but the starting point for the labor market is different—in 2022, it was cooling from an overheated state; now, it starts from an already loosened position. If oil pressure persists, consumer pressure may come faster. This lagged transmission mechanism is the most easily overlooked and most worth tracking risk.
Citi also explicitly notes that current analyst earnings forecasts are clearly lagging and have not fully incorporated extreme scenarios of oil price and interest rate volatility from geopolitical conflict. If macro variables escalate further, current earnings expectations still have room for downward revision.
Oil Scenarios: Two Paths, Two Outcomes
The direction of oil prices will directly determine whether the earnings narrative can truly take over the market.
Citi offers two scenarios.
In the base case, oil prices gradually fall from current highs. Even if a ceasefire is reached in the Middle East, supply recovery will take months due to damaged production facilities. In this scenario, Q1 earnings will likely be decent, but management guidance will flag lingering effects in Q2. The market will likely treat this as a short-term disruption and shift focus to the second-half recovery, allowing the earnings narrative to smoothly take over.
In the stress scenario, if oil prices stay above USD 90 for an extended period, the market will refocus on stagflation risks, with significantly greater downward earnings pressure—consumer pressure, margin compression, and narrowing Fed policy room will all ferment simultaneously. Citi believes this scenario would be more severe than the base case but should not repeat the intensity of 2022.
Summary
The market's desensitization to Strait events is a rational adaptation with historical evidence and structural support: fear has been priced once, energy stocks provide internal hedging, historical patterns lower institutional panic thresholds, and political game logic provides psychological support.
The narrative shift to earnings also has solid data support: earnings growth is about to enter its sixth consecutive double-digit quarter, analysts have consistently raised full-year estimates despite multiple shocks, and current-quarter numbers have not been materially contaminated by the war.
But the quality of this growth is uneven. Citi's analysis reveals that earnings are highly concentrated in tech and energy, with other sectors quietly being revised down; analyst forecasts have not fully digested extreme oil scenarios; and Q1 beats may not fully dispel market concerns about the future.
Whether earnings can truly take over the narrative hinges on oil. The expiration of the two-week ceasefire remains the most critical variable to watch.
Risk Disclaimer: This content is for reference only and does not represent any investment advice. Markets are risky; invest with caution.
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