Despite rising tensions surrounding Iran and increasing fuel prices, stock markets remain remarkably stable. While consumers immediately feel the impact at the gas station and in their day-to-day spending, financial markets react far less dramatically. According to Patrick Verwijmeren, Professor of Corporate Finance at Erasmus School of Economics, this is because investors view a different reality from consumers.
‘Shares are not valued based on what happens today, but on expectations of future profits,’ Verwijmeren states. As a result, higher oil and energy prices do not automatically lead to sharp declines on the stock market. As long as investors assume that the economic consequences are temporary, markets tend to remain relatively calm.
According to the Professor of Corporate Finance, financial markets mainly respond to new information and unexpected developments. Shortly after the outbreak of war, stock prices initially fell due to uncertainty. However, when investors began to expect a less prolonged escalation, a rapid recovery followed. ‘The surprise is often not in the conflict itself, but in the question of how large and long-lasting its impact will be,’ is the underlying idea of his analysis.
This does not mean that all companies emerge unscathed from geopolitical tensions. Verwijmeren points out that the effects vary significantly by sector. Defence companies may benefit from higher government spending and expected revenue growth, while airlines and firms heavily dependent on fuel can come under pressure. As a result, broad market indices may appear relatively stable, even while individual companies experience significant movements.
The growing influence of retail investors also does not fundamentally change the bigger picture, according to Verwijmeren. Large institutional investors and analysts at banks and investment funds still largely determine the direction of the market. They continuously assess whether a conflict causes temporary disruption or structural economic damage. As long as the latter is not expected, major shocks on the stock market often remain limited.
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You can read the full interview with Patrick Verwijmeren here (in Dutch) on Quest.nl. For more information, please contact Ronald de Groot, Media & Public Relations Officer at Erasmus School of Economics: rdegroot@ese.eur.nl, +31 6 53 641 846.
