A divergence is emerging on Wall Street: equity investors have rushed to celebrate as if the U.S.-Iran conflict never occurred, while the bond and commodity markets are telling a markedly different, more cautious story.
Both the S&P 500 and the Nasdaq Composite indices have climbed to new record highs. However, U.S. Treasury yields remain elevated, and oil prices are still significantly above their pre-war levels. Concerns over lasting damage to Middle Eastern energy infrastructure, coupled with inflationary pressures limiting the Federal Reserve's capacity to cut interest rates, have prevented bond investors from joining the stock market rally.
Analysts note that, collectively, these market signals suggest that even if a final peace agreement is reached between the U.S. and Iran, Wall Street professionals are skeptical that the global economy can simply revert to its pre-war trajectory. This backdrop may pose a potential warning for equities, though some argue that investors have grown accustomed to this environment of high inflation and uncertainty, suggesting stocks may not face immediate pressure.
**Equities Rally Strongly to New Peaks** Initially, the outbreak of U.S.-Iran tensions severely dampened market sentiment. The S&P 500 fell as much as 8% below its pre-conflict level, reflecting broad anxiety over the uncertainty and its potential impact on the global economy.
A turning point came late on April 7. Following the announcement of a two-week ceasefire by the former president, major stock indices staged a sharp rebound. Subsequently, even as a maritime blockade was imposed on Iranian ports, the S&P 500 and Nasdaq continued to set new records. Last Friday, remarks from Iran's foreign minister that the Strait of Hormuz was "fully open" to commercial vessels further boosted sentiment, extending the gains for both indices.
Sonu Varghese, Global Macro Strategist at Carson Group, suggested that given the series of shocks over the past five years, the U.S. appears to be operating within a higher inflation regime. However, he maintained an overall optimistic outlook on equities, noting that persistent inflation has been accompanied by healthy corporate earnings. In the coming week, investors will closely monitor progress in U.S.-Iran peace talks and earnings reports from companies such as UnitedHealth, Tesla, and Lockheed Martin.
**Bond and Oil Markets Signal Differing Views, Rate Cut Expectations Diminish** In stark contrast to the exuberance in equities, the bond and crude oil markets have lagged, reflecting deeper investor concerns about the inflation outlook.
The yield on the benchmark 10-year U.S. Treasury note settled at 4.244% last Friday. While this is down from 4.439% at the end of March, it remains notably higher than the 3.961% level seen in late February, before the conflict. Meanwhile, U.S. crude oil futures for December delivery settled at $72.65 a barrel last Friday, down about 8% from their recent peak on March 20 but still 14% higher than on February 27, before the war began.
Shifts in expectations for interest rate cuts are even more pronounced. According to CME Group data, before the conflict, interest rate futures indicated a 79% probability that the Fed would cut rates at least twice this year. That probability has now plummeted to 11%, with markets viewing the chance of any rate cut this year as essentially a coin toss.
Inflation data also remains concerning. The core Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, is anticipated to exceed 3% when released later this month, up from 2.8% last October.
Blake Gwinn, Head of U.S. Rates Strategy at RBC Capital Markets, stated, "For the past month-plus, our focus has been on the situation with Iran, but underneath that, the data we continue to get, I think, supports the case for the Fed to be more hawkish."
Some investors also point to fiscal deficit concerns as supporting Treasury yields. Last year, a surge in tariff revenues temporarily alleviated deficit worries. However, a Supreme Court ruling in February that deemed most of the former president's tariff measures illegal clouded that outlook, and the additional military spending required by the Iran conflict has exacerbated the situation. A widening deficit means the government must issue more bonds to finance itself, which pressures bond prices and pushes yields higher.
Analysts indicate that in this context, some investors are cautious about the sustainability of the equity rally. Brian Jacobsen, Chief Economist at Annex Wealth Management, noted that even before the war, he was concerned about pressure on corporate profit margins, and the Middle East conflict has only intensified those worries.
He pointed out that rising energy prices increase input costs for businesses, but companies may struggle to pass these costs on to consumers already strained by high prices. "The damage isn't just to Middle Eastern infrastructure and capacity, but also to household budgets—consumers have already paid for weeks of high oil prices."
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