Stock Market Ignores Inflation Playbook Amid War

Analysis published by MarketWatch on May 14, 2026, highlights a significant divergence in financial markets 75 days into the ongoing war. While traditional inflation hedges are performing as expected, the U.S. stock market is breaking from the historical script. The S&P 500 has gained 8% since the conflict began, a period where headline inflation has averaged 5.2%, challenging the long-held belief that high inflation is unequivocally negative for equities.

Why Are Equities Defying Inflationary Pressure?

The primary driver behind the equity market's resilience is strong corporate profitability. Many large-cap companies have demonstrated significant pricing power, successfully passing higher input costs onto consumers and preserving profit margins. S&P 500 non-financial company margins have held firm at an average of 11.5% this quarter, defying analyst predictions of compression. This suggests investors are rewarding earnings certainty over macroeconomic fears.

the composition of the current inflation is a key factor. Unlike the demand-driven inflation of past cycles, today's price pressures are largely attributed to supply-chain shocks exacerbated by the war. Energy prices alone have contributed over 30% to the headline inflation number. Some market participants are betting that these supply issues will eventually resolve, allowing inflation to cool without the Federal Reserve needing to trigger a deep recession.

Which Assets Are Following the Traditional Playbook?

While stocks chart an unusual course, the commodity markets are acting exactly as expected during a period of inflation and conflict. Gold, the classic safe-haven asset and inflation hedge, has climbed to $2,150 per ounce. Industrial and energy commodities have seen even more dramatic moves. West Texas Intermediate (WTI) crude oil has surged 25% to over $110 per barrel in the 75 days since hostilities commenced, reflecting both supply fears and its role as a real asset.

The bond market is also adhering to the script. In response to persistent inflation and a hawkish central bank, yields have risen sharply, causing bond prices to fall. The benchmark 10-year Treasury yield has climbed 75 basis points to 4.50% this quarter, inflicting losses on fixed-income portfolios. This repricing reflects the market's expectation of continued interest rate hikes to combat inflation.

What Is the Role of the US Dollar?

The U.S. dollar is serving a dual role as both a primary safe-haven asset and a beneficiary of rising interest rate differentials. The Dollar Index (DXY), which measures the greenback against a basket of foreign currencies, has reached a two-year high of 105.50. International investors are seeking refuge in dollar-denominated assets amid the geopolitical uncertainty in other regions.

A key risk, however, is that this dollar strength could become a headwind for the very equity rally it is currently supporting. U.S. multinational corporations in the S&P 500 derive approximately 40% of their revenue from overseas. A persistently strong dollar makes their goods less competitive abroad and reduces the value of foreign profits when repatriated, potentially threatening the earnings resilience that has buoyed the market.

How Are Investors Repositioning Portfolios?

Institutional investors are adjusting their asset allocation to manage this complex environment. A clear rotation is underway from high-duration growth stocks, which are sensitive to rising discount rates, toward value and dividend-paying equities. Sectors that benefit directly from inflation, such as energy and materials, have seen significant inflows.

Data from exchange-traded funds (ETFs) confirms this trend. Net flows into energy sector ETFs have increased by over $5 billion in the past month alone, while technology-focused funds have experienced modest outflows. This strategic shift indicates that while investors are not abandoning equities entirely, they are seeking to reduce risk and align their portfolios with the prevailing macroeconomic forces of inflation and rising rates.

Q: Has this type of market divergence happened before?

A: Yes, but it is uncommon. During the post-WWII recovery, periods of high inflation coexisted with strong equity performance as the economy rebuilt. However, the stagflation of the 1970s provides a cautionary tale, where both stocks and bonds performed poorly amid high inflation, with the S&P 500 losing over 40% in real terms during that decade.

Q: What is the Federal Reserve's current stance?

A: The Federal Reserve has signaled a hawkish stance, prioritizing inflation control. Markets are currently pricing in an additional 125 basis points in rate hikes by year-end. The key uncertainty is whether the Fed can engineer a soft landing or if its aggressive tightening will trigger a recession, which would abruptly end the equity market's resilience.

Q: How does the ongoing war affect commodity prices specifically?

A: The conflict directly impacts supply chains for key commodities like oil, natural gas, and grains. Sanctions and physical disruptions have removed a significant portion of global supply from the market. For instance, wheat futures are up over 50% since the war began, directly impacting global food prices and adding to headline inflation figures.

Bottom Line

Resilient corporate earnings are currently outweighing traditional inflation fears, but this divergence hinges on the Federal Reserve avoiding a hard landing.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.