We all know that markets can climb walls of worry and brush off bad news even while the front pages scream about war and sanctions, and contrarian pundits worry about (or gloat over) the prospect of dollar collapse. The past several months have been a textbook illustration. The conflict with Iran grinds on with whiplash announcements of on/off peace deals, the Strait of Hormuz — that narrow waterway through which roughly a fifth of the world’s seaborne oil passes — remains under naval blockade; and yet the S&P 500 has rallied, the dollar has held firm, and corporate earnings have come in stronger than expected. The temptation is to call this complacency; a more accurate reading may be that durable forces are doing the heavy lifting beneath the daily noise.
The Dollar Remains a Superpower
Every few years, a fresh geopolitical shock revives predictions that the U.S. dollar is about to lose its perch ruling the roost of global currencies. The “petrodollar” theory gets trotted out: take away oil pricing in dollars, the argument goes, and the whole edifice topples. It is a convenient story for doomsayers, but it inverts cause and effect. Oil producers chose to price in dollars because the dollar was already the common yardstick against which most prices, contracts, and values are quoted — for a host of reasons which have not fundamentally changed, including U.S. military and blue-water naval hegemony as well as the unchallenged role of the U.S. as a preeminent destination for global capital seeking the rule of law and the productivity that comes with it. The petrodollar was a consequence of dollar dominance, not its source, even if its development served to cement that dominance still further.
The real engine is the network effect. Daily turnover in foreign-exchange markets runs roughly $9.6 trillion. Global merchandise trade for a full year is about $40 trillion. In other words, the FX market churns through a year of global trade every four days — and the dollar appears on one side of about 89% of those transactions. Dislodging that would require, as we have observed for years, not merely an alternative currency or alternative currency transmission rails — but an alternative legal system as generally predictable as that in the U.S., an alternative capital market as deep as that in the U.S., and an alternative security architecture as effective as the global umbrella provided by the U.S. None of those exist today; and none look close to viability in the near or mid-term future.
What about a more distant future — are there cracks showing there? The freezing of Russian sovereign reserves in 2022 reminded every central banker that dollar assets are, in the end, held at Washington’s pleasure. Central banks have been buying gold at an accelerating pace and broadening their geographic mix of reserves. Countries are quietly building alternative payment rails. However, none of this threatens the dollar tomorrow, the day after tomorrow, or frankly for decades to come, if ever. But it is worth watching, because the dollar’s status is the silent assumption underneath almost every portfolio decision an American investor makes.
The Ratchet Effect
If the dollar is the foundation, the second pillar is the asymmetric way stocks process news. Good news, or even the hint of it, is reason to rally. Anything short of unmistakably bad news gets a shrug when animal spirits are present and growth projections are moored in some approximation of sanity and sobriety. Markets ratchet upward.
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A vivid example arrived recently when reports of a U.S.–Iran deal to reopen the Strait of Hormuz sent S&P 500 futures up about 1% over a single weekend and dropped Brent crude more than $8 a barrel. When fresh strikes followed and the deal looked wobbly, stocks gave back only about half of those gains. “Heads I win a dollar, tails I lose fifty cents” repeated thousands of times, creates bull markets.
The VIX — an index that measures the market’s expected swings in the S&P 500 over the coming month, often called the “fear gauge” — has been sitting in the comfortable lowlands of the low-to-mid teens. More interestingly, the usual skew in options pricing, where downside protection costs more than upside participation, has flattened. Institutional investors are buying upside call options as “FOMO insurance” — hedging against the risk of missing a tech-led rally rather than against a crash. When the fear gauge mostly measures the fear of being left behind, you have a sense of the prevailing mood.
Earnings Doing the Work
So far this year, the S&P 500 is up roughly 10%, but forward earnings estimates have risen about 15%, meaning the forward price-to-earnings multiple (a stock’s price divided by the profits it is expected to generate) has actually declined slightly. Investors are getting more future earnings per dollar of stock investment than they were in January, assuming that forward estimates are not getting fantastical. (This is an assumption one can examine critically, but it is not a heroic assumption.)
Major Wall Street strategists are projecting S&P 500 earnings near $340 per share in 2026 — up roughly 24% year-over-year — and around $385 in 2027, with year-end index targets in the neighborhood of 8000 (Goldman recently reaffirmed theirs). Roughly half of that growth is being delivered by companies tied to the artificial-intelligence build-out: the chipmakers, the hyperscalers (the handful of cloud giants like Amazon, Alphabet, Meta, and Microsoft that are spending hundreds of billions on AI infrastructure), and the power and grid companies feeding electricity to data centers.
This is quite different from past concentrated rallies, as analysts have been pointing out for some time. The late-1990s episode was a multiple-expansion story — prices ran far ahead of profits. This one is a profits story, with prices roughly keeping pace. That does not make stocks cheap, since valuations remain elevated relative to long-run history, but it makes the bull case much more defensible.
What It Means for Portfolios
Do not bet against the dollar because of geopolitical theatrics as analyzed by “permabears”; the network effects supporting it are far deeper than headlines suggest. Keeping out of a market a market that “wants to go up,” as the old tape-readers say (and this one manifestly does “want to go up”) is a humbling exercise, and don’t forget that being chronically underexposed is itself a risk. The earnings story argues for owning the AI build-out, but with some discipline: the hyperscalers and power-infrastructure names have, on the whole, lagged their own earnings growth, while many semiconductor valuations have run ahead. And because so much of the index now leans on a handful of AI-linked names, balancing the portfolio with companies that have strong earnings momentum but minimal AI sensitivity — selected names in energy, materials, and perhaps health care come to mind — is prudent diversification. Of course, as is always the case, a correction could come at any time; if the established backdrop holds, we would regard such a correction as an opportunity to gain or deepen exposure to our favorite themes and ideas.
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