The Iran conflict continues to dominate the headlines. A Monday rally fueled by ceasefire optimism was quickly undone when Iran denied negotiations were underway. There appears to be some urgency to find a resolution although nothing appears imminent at this point. Stocks, bonds, and precious metals all remain volatile. Oil continues triggering inflation risk. The market is now pricing in rate hikes this year, not rate cuts. Political rhetoric is likely to keep whipsawing asset prices until a more permanent solution in the Middle East is reached.
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Market Moves
Weekly Market Snapshot:
- S&P 500: -2.1% – geopolitical headlines were the dominant driver all week and keep pushing U.S. equities closer to correction territory.
- Nasdaq 100: -3.3% – every one of the magnificent 7 stocks is down at least 13% from its all-time high as investors pull away from growth-oriented names.
- Russell 2000: +0.6% – a rotation from large-caps to small-caps suggests that investors aren’t abandoning equities altogether; this may be where investors are ending up if Treasuries and gold keep falling.
- VIX: 31.1 – volatility is nearing its highs of the past year; pretty much every major asset class is moving sharply up and down making this a broadly stressful environment.
- Gold: +0.3% – many view gold as a safe haven asset, but in reality it’s an uncorrelated asset to stocks; that means it pretty much does whatever it wants, which is what we’ve been seeing for weeks.
- 10-Year Treasury Yield: 4.43% – yields continue moving sharply higher as the Iran war keeps raising inflation expectations and the market prices out any likelihood of a rate cut this year.
Drivers:
It’s all about the war in Iran right now. The White House is working to control the narrative in order to help lift stocks and bring oil prices back down. But it’s only having mixed success. Conflicting signals out of the United States and Iran has only served to halt short-term rallies and raise volatility further. The range of potential outcomes to this conflict from further escalation to quick resolution makes knowing when to buy and sell right now very challenging. The behavior of Treasuries and gold recently make today look a whole lot like 2022. Back then, there were no true safe havens and investors hung out in defensive equities.
Economic Highlights
A couple of the notable themes that stood out this week:
Stagflation Risk Is Getting Real
Stagflation is generally defined as slowing economic growth with rising inflation. It’s pretty much a worst-case scenario for an economy (look back at the 1970s if you want to see what can happen). The Fed, in these instances, is in an impossible position. If it cuts rates to address the growth problem, it can make inflation even worse. If it hikes rates to address inflation, it could sink the economy into recession.
This is the situation the U.S. economy is facing right now.
GDP growth in Q4 2025 slipped to an annualized rate of just 0.7%.1 The Atlanta Fed’s estimate for Q1 2026 GDP growth has been declining.2 The events in the Middle East and their impact to the global energy market is likely to suppress GDP further the longer it lasts.
Source: Atlanta Fed.
On top of that, the OECD recently came out with a report saying that inflation was likely to top 4% this year due to events in the Middle East.3 Even if there were to be a resolution in the next couple weeks, the damage that’s already been done to energy stockpiles around the world and global supply chains could take months to unwind.
The fact that most of this is being driven by geopolitics makes this very difficult to forecast for investors. The Iran conflict could be over this weekend or it might not be over until this summer, no one knows. We’ll likely see a rally in all asset prices once this war comes to an end. That could take days or it could take months. But the decelerating economic growth and accelerating inflation we’re already seeing won’t disappear soon.
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PMI Data Shows U.S. Economy Continuing to Slow
The latest PMI data continues to confirm a trend that we’re seeing with data elsewhere – the U.S. economy is still expanding, but it’s doing so at a much slower pace.
The March Composite PMI report came in at 51.4 (anything above 50 indicates expansion).4 That’s the lowest reading since April of last year and continues a downtrend that’s been in place since July.
Source: S&P Global.
The composition of where economic growth is coming from is also changing. For years, the U.S. economy has been services-driven. Now, the manufacturing sector is expanding at a faster pace than the services sector. Manufacturing has been performing steadily over most of the past year, but it’s the services segment that’s slowing.
The overall trend, however, is what’s important. U.S. economic growth has been resilient, but the heavily-watched signals, including this and GDP growth, are showing an economy that’s deteriorating. Given the current backdrop, it’s not unrealistic to think that the U.S. could slip into recession later this year.
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Rate Hikes are More Likely Than Rate Cuts in 2026
One of the things that’s helped push stock prices higher is the belief that the Fed would cut rates multiple times in 2026. Lower rates and looser monetary conditions are supportive of growth and that would help the S&P 500 to continue setting new highs.
Right now, the market has priced out that possibility completely. The Fed Funds futures market is pricing in just a 1% chance of a rate cut by the end of 2026.5 One month ago, that number was 96%.
Source: CME Group.
In an environment where the Fed has to address both economic growth and inflation, they usually choose the latter. It’s possible that this reverses somewhat once there’s a solution in the Middle East, but the market is anticipating inflation risk for the next several months. In short, what was supposed to be a tailwind for the market is turning into a headwind.
Traditionally, this is negative for both stocks and bonds. That’s contributing to what we’re seeing in the markets over the past month.
The Week Ahead
A few themes to watch next week:
In Summary
Market volatility continues to increase and will likely keep doing so until geopolitical risks start to settle. Every major asset class is getting hit right now and there are no real safe spaces outside of cash. The latest labor market data has an opportunity to settle some nerves, but it was already trending in the wrong direction long before the events in the Middle East. There does appear to be a sense of urgency in Washington to end the Iran war, but it’s impossible to say when or if that will happen.
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