Deal or No Deal with Iran? For the past month, investors have been trying to handicap the same question: is there a deal coming with Iran, or just another round of contradictory headlines dressed up as progress?
One day, a ceasefire extension with Iran appears imminent. The next, the White House—or Iran, depending on the hour—denies reports of a deal as “a complete fabrication.” One side or the other floats progress on reopening the Strait of Hormuz. Then U.S. strikes resume, Iran claims retaliation, and the market is back to guessing. Oil spikes, stocks retreat, officials talk, oil fades, stocks recover. Rinse, repeat.
One day, a ceasefire extension with Iran appears imminent. The next, the White House—or Iran, depending on the hour—denies reports of a deal as “a complete fabrication.” One side or the other floats progress on reopening the Strait of Hormuz. Then U.S. strikes resume, Iran claims retaliation, and the market is back to guessing. Oil spikes, stocks retreat, officials talk, oil fades, stocks recover. Rinse, repeat.
As of late yesterday, the latest version: negotiators had reportedly reached a 60-day memorandum of understanding to extend the ceasefire and continue nuclear talks, pending President Trump’s final approval. Stocks responded immediately, with the S&P 500 and Nasdaq Composite hitting fresh highs before traders remembered—correctly—that “reported,” “pending,” and “Iran” do not exactly add up to closure.
Still, the market’s message has been consistent. Investors do not need peace. They need enough evidence that the worst-case scenarios are not taking hold.
That has been enough to keep the rally alive.
Inflation: The Bill Comes Due
The problem is that avoiding the worst-case scenarios can still leave a mark.
The latest PCE inflation report showed prices rising 3.8% from a year ago, the highest level in nearly three years. Inflation is well above the Fed’s 2% target, gasoline prices are up sharply since the war began, and the pressure is no longer limited to the pump.
Food, clothing, electricity, services, and tariff-sensitive goods have all shown signs of price pressure. Meanwhile, inflation-adjusted income slipped, spending slowed, and the household savings rate fell to its lowest level in several years.
That matters because the bullish case depends on the consumer holding up. So far, consumer spending has remained resilient, especially among higher-income households. But resilience is not immunity.
The Fed’s New Problem
This is the backdrop Kevin Warsh inherits as the new Federal Reserve chair.
Warsh has spoken favorably about lower rates and the disinflationary potential of AI-driven productivity. That may prove true over time. But in the short term, he is taking over a Fed facing elevated inflation, volatile oil, a still-resilient labor market, and growing political pressure from both directions.
The market began the year expecting rate cuts. It is now debating whether the Fed’s next move could be a hike. For now, the most likely outcome is no move at all. That leaves investors without the policy support they had hoped for.
Earnings and AI Still Carry the Load
Fortunately for the bulls, earnings have been strong.
Corporate results have continued to surprise to the upside, with technology and AI-linked spending doing much of the heavy lifting. But the tone has changed. Investors are no longer rewarding AI promises equally. They want evidence: revenue growth, margin leverage, cloud acceleration, orders, CapEx (capital expenditure) discipline, and signs that massive spending is producing returns.
That is the tension in this market. Earnings are strong enough to justify optimism, but valuations leave little room for disappointment.
Going Forward
The bullish case is straightforward: a ceasefire extension holds, oil continues to retreat, inflation peaks, the Fed stays on hold, and earnings growth remains strong enough to support valuations. In that world, the market can grind higher, helped by AI investment, resilient employment, and investors who remain more skeptical than euphoric.
The bearish case is just as clear. If Iran talks fail, oil moves back above $100, inflation broadens further, or consumer spending cracks, the Fed’s hands become tied and valuations become harder to defend. A market priced for containment would then have to reprice for persistence.
And persistence is the risk. A brief oil shock can be absorbed. A prolonged one starts to work its way into inflation expectations, consumer behavior, corporate margins, and eventually earnings estimates.
Bottom Line
This is still a market being pulled between two forces: the drag of higher prices and the lift of earnings growth. For now, earnings and AI are winning. Oil and inflation are contained enough. The Fed is quiet enough. And investors are comfortable enough.
Deal or no deal, that comfort is conditional.
And For What It’s Worth…
As reported in The Week, residents of an Atlanta neighborhood have been besieged by dozens of empty Waymo robotaxis that drive aimlessly around cul-de-sacs on dead-end streets, especially early in the morning. “Yesterday morning we had 50 cars that came through,” a resident told a local TV station.
The vehicles' routing algorithms seemingly became confused by the street layouts, causing them to get stuck in perpetual neighborhood loops. When a frustrated homeowner put a sign in the street warning of children playing, eight cars “got stuck trying to figure out how to turn around,” said a resident.
Waymo said it was addressing this “routing behavior.”
Artificial intelligence may be changing the world, but apparently it still struggles with bad maps, dead ends, and the illusion that motion equals progress.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection remains paramount.
--David
Still, the market’s message has been consistent. Investors do not need peace. They need enough evidence that the worst-case scenarios are not taking hold.
That has been enough to keep the rally alive.
Inflation: The Bill Comes Due
The problem is that avoiding the worst-case scenarios can still leave a mark.
The latest PCE inflation report showed prices rising 3.8% from a year ago, the highest level in nearly three years. Inflation is well above the Fed’s 2% target, gasoline prices are up sharply since the war began, and the pressure is no longer limited to the pump.
Food, clothing, electricity, services, and tariff-sensitive goods have all shown signs of price pressure. Meanwhile, inflation-adjusted income slipped, spending slowed, and the household savings rate fell to its lowest level in several years.
That matters because the bullish case depends on the consumer holding up. So far, consumer spending has remained resilient, especially among higher-income households. But resilience is not immunity.
The Fed’s New Problem
This is the backdrop Kevin Warsh inherits as the new Federal Reserve chair.
Warsh has spoken favorably about lower rates and the disinflationary potential of AI-driven productivity. That may prove true over time. But in the short term, he is taking over a Fed facing elevated inflation, volatile oil, a still-resilient labor market, and growing political pressure from both directions.
The market began the year expecting rate cuts. It is now debating whether the Fed’s next move could be a hike. For now, the most likely outcome is no move at all. That leaves investors without the policy support they had hoped for.
Earnings and AI Still Carry the Load
Fortunately for the bulls, earnings have been strong.
Corporate results have continued to surprise to the upside, with technology and AI-linked spending doing much of the heavy lifting. But the tone has changed. Investors are no longer rewarding AI promises equally. They want evidence: revenue growth, margin leverage, cloud acceleration, orders, CapEx (capital expenditure) discipline, and signs that massive spending is producing returns.
That is the tension in this market. Earnings are strong enough to justify optimism, but valuations leave little room for disappointment.
Going Forward
The bullish case is straightforward: a ceasefire extension holds, oil continues to retreat, inflation peaks, the Fed stays on hold, and earnings growth remains strong enough to support valuations. In that world, the market can grind higher, helped by AI investment, resilient employment, and investors who remain more skeptical than euphoric.
The bearish case is just as clear. If Iran talks fail, oil moves back above $100, inflation broadens further, or consumer spending cracks, the Fed’s hands become tied and valuations become harder to defend. A market priced for containment would then have to reprice for persistence.
And persistence is the risk. A brief oil shock can be absorbed. A prolonged one starts to work its way into inflation expectations, consumer behavior, corporate margins, and eventually earnings estimates.
Bottom Line
This is still a market being pulled between two forces: the drag of higher prices and the lift of earnings growth. For now, earnings and AI are winning. Oil and inflation are contained enough. The Fed is quiet enough. And investors are comfortable enough.
Deal or no deal, that comfort is conditional.
And For What It’s Worth…
As reported in The Week, residents of an Atlanta neighborhood have been besieged by dozens of empty Waymo robotaxis that drive aimlessly around cul-de-sacs on dead-end streets, especially early in the morning. “Yesterday morning we had 50 cars that came through,” a resident told a local TV station.
The vehicles' routing algorithms seemingly became confused by the street layouts, causing them to get stuck in perpetual neighborhood loops. When a frustrated homeowner put a sign in the street warning of children playing, eight cars “got stuck trying to figure out how to turn around,” said a resident.
Waymo said it was addressing this “routing behavior.”
Artificial intelligence may be changing the world, but apparently it still struggles with bad maps, dead ends, and the illusion that motion equals progress.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection remains paramount.
--David
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