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U.S. stocks are looking to end their worst quarter in four years with a big swing to the upside, as the final trading day of the month begins much like the first, with investors whipsawed by Iran war headlines and the latest set of contradictory signals from the White House.

The fog of war has stoked a massive surge in the market’s so-called “fear gauge,” the Cboe Group’s VIX index, over the past two months, taking it to levels normally associated with extreme volatility.

The gauge was last marked at around 29 points, a level that suggests options traders are bracing for daily moves of around 115 points, or 1.8%, for the S&P 500 over the coming month.

Tuesday’s early gains, expected to add around 1% to the benchmark by the opening bell, are largely tied to a report in The Wall Street Journal, suggesting President Donald Trump is willing to end the U.S. war in Iran without reopening the Strait of Hormuz, the world’s key energy market thoroughfare.

“VIX futures suggest markets aren’t pricing an immediate escalation overnight,” Saxo Bank strategists wrote on Tuesday.

“The core driver remains the Iran conflict and its impact on oil, inflation expectations, and growth risks,” they added. “Markets are increasingly reacting less to headlines alone and more to whether there is a credible path toward de-escalation, which keeps volatility sensitive but less explosive than last week.”

The report, which contradicts multiple Trump demands that Iran allow free passage through the strait or face existential consequences, is giving stocks a late-quarter lift, but has largely left prices in the oil and energy complex unchanged.

Brent crude, the global pricing benchmark, was last changing hands at $107.16 a barrel, a level that would mark the largest monthly gain on record and extend its 66% surge since the start of the year.

WTI crude, a better barometer for U.S. consumer energy prices and GDP growth prospects, has risen more than 50% since the start of the war and closed north of $100 a barrel for the first time since 2022 on Monday.

Those elevated prices, which futures suggest will remain north of prewar levels until at least the end of the year, are likely to present a challenging headwind for stocks heading into the second quarter as inflation ticks higher and the Federal Reserve delays interest-rate reductions as a result.

“We don’t know what the economic effects will be, (but) we do think our policy is in a good place for us to wait and see,” Fed Chair Jerome Powell told an event at Harvard University on Monday.

Furthermore, stocks have a lot of catching up to do, and that is a massive caveat in the current maelstrom of Iran war headlines.

The S&P 500 is still some 4% south of its 200-day moving average, which it breached for the first time in more than a year on March 20. If that key performance indicator isn’t reclaimed by Friday, it could signal a bigger pullback for the benchmark heading into the second quarter.

That said, the first-quarter earnings reporting season is only two weeks away, with JPMorgan Chase and the major banks kicking things off.

LSEG data suggests collective S&P 500 profits will rise 14.1% from last year to around $629.3 billion, led by tech, financials and healthcare. Full-year earnings are forecast to rise by around 18.8%.

“Our confidence in the earnings outlook for 2026 hasn’t wavered, and future earnings are available to investors at a discounted price following the stock market pullback,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.

“Once a path to ending the conflict becomes clear and oil and interest rates come back down, stocks should get a nice jolt to the upside as earnings recapture investor attention,” he added.

Whether Tuesday’s rebound marks the entrance to that path, or another meandering trail of foggy wartime reactions, remains to be seen.

Write to Martin Baccardax at martin.baccardax@barrons.com

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