Towards the end of Q1, tensions in the Middle East dragged markets down. But now they appear to have clawed back most of those losses.

So what’s going on?

More than it seems

The big news everyone was talking about is the temporary ceasefire deal that was agreed with Iran last week. The Dow shot up over 1,100 points on 1 April and oil prices dropped on news the Strait of Hormuz could reopen.

That calmed inflation worries but since then, talks have broken down. Markets can often overreact to headlines and for now, the full story remains unclear.

Regardless, looking closer, there may be another reason behind the rally apart from hopes of peace: strong earnings.

Q4 2025 saw 13% year-on-year earnings growth for the S&P 500 — six points ahead of expectations. Analysts upped 2026 earnings forecasts too, with Goldman Sachs now eyeing 12% growth for the index this year. 

IPOs and deals are picking up and fears of a recession are fading, beating back Q1’s gloom on oil and inflation. So what’s driving the growth?

Broadening horizons

What’s particularly notable about this rally is that it’s spreading beyond the usual tech hype. Shares in industrials like Caterpillar (NYSE: CAT) went from around $720 in early April to almost $800 towards the end of last week.

That’s close to a 10% rise in just over a week.

The equipment manufacturer’s results look good too — Q4 2025 revenue hit a record $19.1bn, up 18% from last year and beating estimates by nearly 8%.

Similarly, earnings beat forecasts by 9.5% to hit $5.16 a share, and the group announced a $51bn sales backlog with orders pouring in.

With around 62% of that backlog expected to become revenue soon, management expects 2026 sales to rise 5%–7% (with confidence in the higher end of that range).

The shares are already up 37% this year, ahead of the industry’s 23% gain. They’ve been riding on key growth drivers like datacentres and mining demand — but will that continue?

What this means for UK investors

This fresh earnings growth definitely feels good but I wouldn’t say the S&P 500 is in the clear yet. Geopolitical tensions could still sway in either direction.

However, Caterpillar stands out to me as a more stable US stock that’s worth considering for UK investors — particularly those looking to diversify abroad.

Of course, it’s not risk-free. Tariffs took a bite out of margins last year, and the company’s fortunes remain tied to the inherently volatile mining industry. If commodity prices take a dip, mining could weaken — particularly with the green energy narrative getting sidelined by unfavourable policies.

Still, the appeal is clear: strong growth potential from that backlog, backed by steady dividends that could compound nicely inside a Stocks and Shares ISA.

On valuation, it looks acceptable for a US growth stock and the expected revenue flows back it up.

Market jitters could still shake things up but as this S&P 500 rebound demonstrates, solid earnings often carry more weight than fleeting headlines.

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