Iran conflict hits a market that's more overvalued than during the 1973 oil shock

By Mark Hulbert

Arab-Israeli war in 1973 and the oil embargo that followed shows that stocks don't always rebound quickly

Israeli tanks on the Syrian front during the Yom Kippur War in October 1973. This war provoked the oil shock of 1973; U.S. stocks sold off sharply and took years to recover.

If the markets react to the Iran conflict like they did to the Arab-Israeli war in 1973, then the S&P 500 wouldn't recover, adjusting for inflation, until early 2033.

The stock market doesn't always recover quickly from an initial decline when war breaks out.

Bear that in mind as the attacks on Iran by the U.S. and Israel roil the S&P 500 SPX and other market benchmarks. Market experts note that U.S. stocks typically are higher within a few months after the outbreak of hostilities. That's likely as long as the conflict doesn't develop into something worse. But prolonged downturns have happened before and could again.

Perhaps the most instructive historical parallel to Iran is what happened in the wake of the October 1973 Yom Kippur War, when forces led by Syria and Egypt attacked Israel. That war led to the Arab oil embargo that spiked U.S. inflation and sunk stocks.

In fact, it wasn't until late 1980 that the dividend-adjusted S&P 500 was higher in inflation-adjusted terms than where it stood at the end of that October 1973 war - as the chart below shows. If something similar happened in reaction to the Iran conflict, then the S&P 500 wouldn't recover, adjusting for inflation, until early 2033.

You may object to this historical parallel on the grounds that the stock market faced unique hurdles in the 1970s that accounted for this dismal recovery. Oil prices (CL00) skyrocketed from the Arab oil embargo that began after that war, for example, leading to double-digit inflation in the U.S. Furthermore, many also point out, the U.S. stock market at that time was already hugely overvalued; this was the Nifty Fifty era, after all. It wouldn't have taken much then to break the stock market, the argument goes.

These objections aren't compelling. It's never been the case that two historical events will be perfectly analogous. But you could just as easily use this argument to dismiss the quick recoveries from past geopolitical crises.

Plus, the U.S. stock market currently is even more overvalued than it was in October 1973. It's not even close, as you can see from the accompanying table, which lists 10 valuation indicators that have had solid historical records forecasting the stock market's return over the subsequent decade. Notice that, in each case, the current market is more overvalued by several orders of magnitude.

Finally, it's worrisome from a contrarian perspective that so many on Wall Street are sanguine about the impact of the Iran conflict on stocks. What happened in the wake of the Yom Kippur War serves as a powerful reminder to not become overconfident that the stock market will quickly recover from an initial shock.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Trump leaves door open for extended U.S. campaign against Iran. What that could mean for the economy.

Also read: Iran conflict just adds to wall of worry for U.S. stocks, says Citi strategist

-Mark Hulbert

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03-02-26 1543ET