Key Points:
- United States stock markets rely on strong artificial intelligence earnings while ignoring rocketing inflation and geopolitical risks.
- Treasury bond yields jumped significantly, with the 30-year bond crossing 5 percent and the 10-year bond passing 4.5 percent.
- The ongoing conflict involving Iran keeps crude oil prices above $100 a barrel, driving up producer prices to a four-year high.
- First-quarter corporate profits surged 28 percent compared to last year, blinding investors to the dangers of a closed Strait of Hormuz.
Investors warn that the United States stock markets ignore the severe risk of a surge in inflation. Equity markets currently ride high on robust first-quarter earnings and massive enthusiasm for artificial intelligence. This tech-driven optimism blinds many traders to the extreme dangers of high energy prices and the unresolved war with Iran.
A sudden spike in bond market yields over the past week could rapidly change the picture for stock buyers. The 30-year Treasury bond recently pushed past 5 percent, while benchmark 10-year bonds crossed 4.5 percent. This sudden jump in yields sparked widespread caution and triggered a stock market pullback on Friday. When bond yields rise, borrowing costs increase for both companies and everyday consumers, which ultimately hurts economic growth.
Paul Karger co-founded TwinFocus, where he manages money for ultra-high-net-worth families. He says his clients constantly bombard him with questions about this apparent market paradox. Karger explains that during every breakfast, lunch, and dinner meeting, clients ask how to make sense of the divided outlook. Corporate earnings tell a very positive story right now, but soaring oil prices and rising inflation threaten to crush company profit margins in the near future.
To handle this chaotic environment, Karger uses a barbell approach for the assets he manages. He accumulates large positions in cash, gold, and other safe commodities. At the same time, he maintains strong positions in the massive tech stocks that currently lead the market upward.
United States stock indexes suffered an initial plunge when the war involving the United States, Israel, and Iran broke out in late February. Since then, the markets have mounted a massive rebound. The benchmark S&P 500 surged more than 17 percent since hitting its lowest point of the year in late March. The index holds a year-to-date gain of over 8 percent, even after Friday’s nearly 1 percent loss.
Rising benchmark yields usually crush stock valuations. High yields offer investors a safer, more competitive return than risky stocks. This dynamic poses a major threat right now because the stock market sits at highly elevated levels. As of Thursday, the S&P 500 traded at 21.3 times the earnings estimates for the next 12 months. That multiple sits well above the historical average of 16. However, it remains below the 23.5 level it hit last October because strong corporate earnings help keep valuations somewhat grounded.
Peter Tuz serves as the president of Chase Investment Counsel in Virginia. He sees a real fear that inflation will embed itself deeply into the economy going forward. Tuz notes that no one sees any signs of inflation easing right now. He warns that if this upward trend continues, it will inevitably drive the stock market down.
Jack Ablin acts as the chief market strategist at Cresset Capital. He points out that the Strait of Hormuz remains closed to oil and liquefied natural gas tankers. Ablin warns that if commercial shipping delays persist for even a few more months, the global economy could face a new inflation regime. He believes investors remain completely unprepared for that outcome.
Despite these glaring risks, equity markets remain strong because companies continue to make money. Publicly traded corporations in the United States reported first-quarter profits that easily beat expectations. These profits track roughly 28 percent higher than a year ago, marking the largest jump seen since late 2021.
Jeremiah Buckley, a portfolio manager at Janus Henderson, credits the artificial intelligence spending boom and a related increase in worker productivity. He expects this tech-driven productivity wave to extend well into 2027. Massive capital spending on data centers and infrastructure constantly boosts the demand for semiconductor chips. However, the high price tags on these technology stocks have led some analysts to predict an upcoming market pullback.
Fear of missing out also keeps money flowing into the stock market. Tim Murray, a capital markets strategist at T. Rowe Price, explains that traders refuse to turn bearish right now. Many investors hope that diplomats will resolve the situation in the Strait of Hormuz within a few weeks. Nobody wants to sell their stocks right before a sudden peace deal sparks another massive rally.
Yet, the risks keep growing. Crude oil trades above $100 a barrel while uncertainty swirls around the temporary ceasefire between Iran and the United States. Producer prices recorded their largest gain in four years during April. John Higgins, chief economic adviser at Capital Economics, warns that markets remain unprepared for an extreme scenario where the Hormuz shutdown drags on. He notes that while the bond market prices in the inflation risk, the stock market completely ignores the threat. Matthew Gertken at BCA concludes that the Iran crisis holds the raw power to reshape the entire market trajectory for the rest of the year.
