NEW YORK CITY, New York: U.S. stocks may look more attractive after recent gains, but rising oil prices linked to the Iran war are emerging as a key risk that could undermine the market's momentum.

The S&P 500 is currently trading at about 20.8 times expected earnings over the next 12 months, near its lowest level in a year and down from over 22 times at the start of 2026. The relatively lower valuation has encouraged investors, even as geopolitical uncertainty persists.

"Investors and market participants are expecting the war with Iran to end relatively quickly, and so they are discounting the long-term risk of the impact of the war. At the same time, the U.S. consumer and economy continue to perform strongly," said Oliver Pursche of Wealthspire Advisors.

However, the situation remains uncertain. The Strait of Hormuz is still largely closed to oil tankers, and a temporary ceasefire is nearing its end without a clear resolution between Washington and Tehran.

Corporate America is increasingly flagging concerns. A Reuters review found that about two-thirds of S&P 500 companies reporting earnings since April have raised concerns about energy prices, compared with just 17 percent in the previous quarter.

GE Aerospace CEO Larry Culp said the company would have raised its forecast if not for the current uncertainty, noting risks such as reduced airline spending if high fuel costs persist. The company's shares fell 6 percent following the remarks.

Despite such warnings, markets remain supported by strong expectations for earnings growth, particularly in sectors linked to artificial intelligence. Analysts say this optimism is a major driver behind the rally.

Still, the outlook depends on whether those expectations hold. Rick Meckler of Cherry Lane Investments said the biggest risk is that higher energy prices could begin to weigh on consumer spending and overall economic activity.

If oil prices remain elevated, the impact could ripple through supply chains and corporate earnings, potentially weakening demand and profitability.

Earnings forecasts for 2026 have already risen sharply, with expected growth increasing from 16 percent in January to nearly 20 percent last week, according to LSEG data. Technology companies account for much of that increase, alongside energy and materials firms.

Some companies are already adjusting. Delta Air Lines recently scrapped planned capacity growth and lowered its profit outlook due to soaring jet fuel costs. Others, such as PepsiCo, said they have hedged energy-related costs for the near term.

The S&P 500 has gained about 4 percent so far this year, and its valuation remains close to its 10-year average of around 19 times earnings.

But analysts warn that any failure to meet elevated earnings expectations, particularly among AI-driven stocks, could quickly reverse recent gains, especially if oil prices remain high and geopolitical tensions persist.