The ongoing conflict centered on Iran has become a source of market volatility, manifesting most directly through elevated oil prices and disruptions across supply chains. Corporate reports across a range of industries note higher freight rates and climbing raw material expenses, and some companies warn that certain supply chains may need months to return to normal.
Analysts at Morgan Stanley characterize the economic impact as uneven. Energy companies are registering a clear benefit from the higher commodity price environment, while consumer spending appears comparatively stable, especially among higher-income households. Firms are increasingly shifting higher input costs onto customers by raising prices, a coping mechanism that has helped many protect profit margins.
US equities have shown an unexpected degree of resilience through the most recent earnings season. Corporate profitability has generally outperformed forecasts even as geopolitical tensions persist and monetary policy signals have shifted. According to a market strategy report, the median firm in the S&P 500 recorded 16% earnings-per-share growth, and the typical earnings surprise - the extent to which companies beat consensus forecasts - measured 6%. That level of outperformance is the strongest seen in four years.
Importantly, the earnings strength is not confined to large technology companies. The report notes that financials, industrials and consumer cyclicals are also contributing to the upward surprise in profits. Revenue trends have been solid as well: companies delivered an average revenue surprise of 2.1%, a result above historical norms and consistent with firms exercising pricing power in the face of rising input costs.
While large technology and semiconductor companies remain influential drivers of market performance, the recovery in corporate results is becoming broader. Small-cap firms, specifically, are now projected to deliver roughly 21% forward earnings growth, a marked increase from projections earlier in the year. Earnings revisions across sectors are also trending higher, pointing to improved expectations for corporate profitability going forward.
On the policy front, the US Federal Reserve has adopted a more cautious posture toward cutting interest rates, citing robust economic data and inflationary risks associated with commodities. As a result, markets have scaled back expectations for near-term reductions in rates.
Historical patterns cited in the report suggest that equities can still perform well when earnings growth remains strong and interest rates are held steady. In such environments, 12-month stock returns have tended to land in the mid-teens range. That historical observation bolsters the constructive narrative for equities so long as earnings momentum persists and no significant external shocks materialize.
Nonetheless, the backdrop is not without vulnerabilities. Analysts call out concerns including liquidity pressures, volatility in the bond market, and continued geopolitical risks. Despite those worries, the consensus view emphasized in the report is that earnings growth remains the primary determinant of market performance.
Looking further ahead, 2026 earnings forecasts are shaped by both revenue expansion and margin improvement. Current projections point to roughly 21% annual earnings growth in 2026, a figure that underpins a cautiously constructive outlook for equities provided no major external disruptions occur.
Summary: The conflict involving Iran has increased oil prices and strained supply chains, producing higher costs that some companies expect will take months to normalize. Morgan Stanley analysts find the impact is uneven: energy firms benefit while higher-income consumer demand remains resilient. Across US equities, earnings have surprised to the upside, with the median S&P 500 company posting 16% EPS growth and a typical 6% earnings beat - the strongest in four years. Revenue surprises averaged 2.1%, and small-cap forward earnings growth expectations have risen to about 21%. The Fed has signaled caution on rate cuts, and 2026 earnings forecasts point to roughly 21% annual growth, supporting a constructive equity outlook if no major shocks occur.
- Key data points: Median S&P 500 EPS growth of 16%; typical earnings beat of 6%; average revenue surprise of 2.1%; small-cap forward earnings growth forecast near 21%; 2026 earnings forecast roughly 21% annual growth.
- Sectors impacted: Energy gains from higher oil prices; technology and semiconductors remain key drivers; financials, industrials and consumer cyclicals contributing to broader earnings strength; small caps showing improved earnings prospects.
- Risks and uncertainties: Liquidity concerns and bond-market volatility could weigh on markets, geopolitical risks could introduce new shocks, and supply-chain disruptions may take months to normalize - each posing downside risk to corporate performance.