As our esteemed leader pointed out this morning, Team Israel/USA v Iran hasn't had the chilling effect we were expecting on stock markets. Quite the opposite in fact. What gives? Why haven't stock markets gone down following the conflict?

When the United States launched a direct strike against Iran, many investors expected markets to tumble. In past decades, this kind of Middle East escalation would have triggered steep falls, oil price spikes, and widespread panic selling. Yet so far, the market reaction has been the opposite.

As Peter Switzer wrote in his column this morning, it has put a "rocket" up stocks:

The Dow Jones finished up 507 points (or 1.19%), the S&P 500 went up 1.11%, while the tech-heavy Nasdaq added a big 1.43% (or 281.56 points). And our market will open in the green and is bound for a good day at the office.

It's in stark contrast to previous conflicts. So why hasn’t the market fallen harder?

Markets have seen this movie before

One explanation is simple: markets are becoming more accustomed to geopolitical shocks. According to AMP Deputy Chief Economist Diana Mousina on this week's episode of Switzer Investing TV, history shows that while markets do typically fall after major geopolitical events, they tend to recover relatively quickly.

In an article you should absolutely read, Mousina analysed a century of data stretching back to World War I and found that while major geopolitical shocks trigger an average 8% decline in share markets in the short term, markets on average rebound by 14% within a year.

“Geopolitical risks do have a negative short-term impact on markets, but they do tend to be short-term,” Mousina said on Switzer Investing TV. “If you’re playing the long game, don’t get too concerned because usually markets do tend to recover from these geopolitical risks.”

Waiting to see Iran’s next move

For now, investors are watching Iran’s response carefully. The market’s relatively calm reaction may reflect a widespread expectation that escalation will remain limited, especially now that the region has simmered into a relative peace thanks to the ceasefire.

As Switzer Report’s Paul Rickard put it: “Until we see Iran really do something — and then that might prompt further US reaction — that’s when the market reacts. At this stage, it just looks a bit like a flare-up.”

The concern, Rickard says, is less about headlines and more about whether Iran is capable — or willing — to respond in a way that forces further retaliation.

“The line coming out of America and Israel is that Iran is severely weakened, and its capacity to respond is not high or meaningful,” he said.

Oil ain't oil, not anymore

Another important factor is oil. While any disruption to oil supplies through the Strait of Hormuz would have global implications, the world economy — particularly the US — is far less reliant on imported oil than it once was.

“America is self-sufficient in oil. This isn’t like the ’70s when America was importing billions of gallons of fuel,” Rickard said.

Mousina also noted that even if oil prices rise, the broader economic impact may be more muted than in past crises. “The intensity of oil use has gone down over time, so maybe we’re a little bit more protected than we used to be from shocks to oil prices,” she said.

As we saw from markets this morning, oil prices have cooled at the rate of tensions in the region:

Central banks remain ready

If oil prices do spike, central banks are unlikely to react hastily. Mousina explained that central banks often “look through” short-term price shocks when setting monetary policy.

“Higher oil prices don’t necessarily seep through into other parts of the inflation basket,” she said. “The central bank would probably be more mindful about trying to support growth through cutting interest rates rather than being worried about inflationary pressures of higher prices.”

That means if global growth slows because of prolonged conflict, rate cuts — not hikes — may become more likely.

It’s still about growth, not just geopolitics

Both Mousina and Rickard agree that while geopolitical risks can move markets in the short term, the bigger driver remains global economic growth, inflation, and corporate earnings.

“Usually, whatever else is going on — like interest rates, inflation, growth, recession risks — that has a bigger impact on share markets than geopolitics,” Mousina said.

For now, those fundamentals remain intact. And for longer-term investors, that could be the real story.