U.S. Equity Markets, Valuations, and the War

Since the U.S. attack on Iran began on February 28, 2026, equity markets have experienced a broad-based selloff with remarkably similar price declines across large, midcap, and small cap stocks. But it’s worth looking closer—the underlying fundamental and valuation dynamics tell a more nuanced story of diverging analyst expectations and investor sentiment. Here’s what you need to know.

All three market cap segments declined by approximately 5% in the month following the U.S. attack, with only 47 basis points separating the best from the worst performer. This tight clustering indicates a broad risk-off move rather than selective rotation between market cap segments.

Despite similar price declines, however, valuation compression varied dramatically. Large caps experienced the steepest P/E contraction at -7.63%, while small caps saw only -2.38% compression, a difference of more than 500 basis points.

Why did this divergence between valuation and price performance happen? The culprit is likely the dramatically different earnings estimate trajectories across market cap segments. In other words: earnings season hit small caps with downgrades, while large and midcaps were broadly upgrades—and small caps had already seen significant P/E compression the week before the bombing began.

Key portfolio takeaways 

• Price action has been uniform across market caps, with all three segments down approximately 5% since the war began. This suggests broad-based risk aversion rather than discriminating sector or size rotation.
• The real divergence is in fundamentals and valuations. Large caps have seen the strongest earnings upgrades but the steepest multiple compression, while small caps faced earnings cuts and due to that were already repriced as the war started.
• Large caps may offer the best risk reward. With earnings estimates rising 2.75% despite geopolitical turmoil, the 7.63% P/E compression suggests the market is overly pessimistic. If earnings materialize as analysts expect, significant re-rating potential exists.
• Small caps may be more vulnerable than they appear. The decline in earnings estimates challenges the narrative that domestic exposure offers insulation—especially if high energy costs persist and erode margins. Limited multiple compression may simply reflect already-depressed valuations rather than resilience. 

Looking ahead: As we’ve consistently highlighted, this environment continues to favor high-quality companies with strong pricing power and operational flexibility. In periods where macro uncertainty drives indiscriminate selling, fundamentals ultimately reassert themselves. 

Sebastian Teper contributed to this article. All data sourced from Bloomberg.