Stocks spent most of the week getting whipsawed around. The ongoing conflict in Iran, the closure of the Strait of Hormuz, and volatile oil prices are making investors think twice about how much risk they’re willing to take here.
Higher energy prices could end up slowing future growth and make it difficult for the Fed to cut rates. The markets began pricing in the possibility of no rates cuts in 2024, while a big downward revision to Q4 GDP growth signals that the economy may be decelerating faster than expected.
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Market Moves
Weekly Market Snapshot:
- S&P 500: -1.6% – stocks gave up gains of more than 1% earlier in the week as oil prices surged and rate cut hopes diminished.
- Nasdaq 100: -1.1% – tech stocks held up better than the broader market for the second straight week, but energy market volatility could ultimately cap short-term outperformance.
- Russell 2000: -1.9% – inflation risk and higher interest rates tend to hit small-caps harder and that’s exactly what we’re continuing to see here.
- VIX: 27.2 – volatility has been on an uptrend all throughout 2026; while this reading is down slightly from last week, it’s well within the range that signals some investor fear.
- Gold: -2.8% – declines in stocks, bonds, and gold at the same time indicate that safe havens aren’t providing any protection; this is common in higher inflation regimes.
- 10-Year Treasury Yield: 4.28% – yields move sharply higher as new inflation fears got priced into the bond market.
Drivers:
This past week was all about oil prices and interest rates. If the war in Iran persists indefinitely, we’re likely to see continued volatility in all asset classes. Inflation has moved back to the top of the list of the markets’ concerns and that probably won’t change until we see a de-escalation in the Middle East.
At this point, old data, such as last week’s February CPI reading, are likely to be ignored as investors try to assess more current events. The market is trading on headlines and we won’t know the full impact of Iran on the data for a few more weeks.
Economic Highlights
A couple of the notable themes that stood out this week:
Crude Oil Hits $100; Bloomberg Makes the Case for $160
The conflict in Iran and the corresponding energy supply disruption remain the key short-term drivers for the markets. Roughly 20% of the world’s total petroleum liquids supply, roughly 20 million barrels per day, runs through the Strait of Hormuz before reaching its final destination. Iran’s response to effectively close off the route has sent energy prices soaring. More importantly, there’s no finish line in sight.
Brent crude oil shot as high as $120 per barrel in the initial escalation before retreating. By the end of the week, they were back above $100 as the market anticipates a lengthier supply disruption.
Source: TradingView.
This, of course, has many ripple effects. At the consumer level, $100 oil would probably translate to gas prices around $3.50 per gallon, give or take. If it moves up to $120, we’re probably looking at $4 a gallon. This would cause a severe pinch to consumers who are already dealing with affordability issues and running up a lot of credit card debt. It will also impact inflation rates. When those move higher, Treasury yields and other rates often move higher as well. As inflation rises, the odds of rate cuts diminish. More on that in a moment.
Bloomberg issued its own set of expectations for the crude oil market. It said that a one-month closure of the Strait of Hormuz would lift oil to $105. A two-month closure could push it to $140 and a three-month closure could lift oil beyond $160.1
Source: Bloomberg.
We’re already about two weeks into the current closure. The longer the Strait remains impassible, the more it impacts consumers, the more it raises inflation rates, and the more it negatively impacts overall GDP.
CPI Moderates in February; The Markets Wait for March
In February, the consumer price index (CPI) rose by 2.4% year-over-year, in line with expectations, while the core rate came in at 2.5%.2 This, however, was perhaps one of the most inconsequential inflation reports in recent memory. Market participants are only interested in the impact of the March oil shock, so this report generated little reaction.
Source: BLS
The January PCE price index report, which is even more delayed, showed a 2.8% year-over-year increase.3 That number is the one the Fed uses and more accurately reflects what the board members will base their decisions on. Either way, the market’s general interpretation is that this data is stale and, for one month at least, doesn’t hold a lot of sway.
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Q4 GDP Gets Revised Significantly Lower
About a month ago, the street was expecting a Q4 2025 GDP growth print of +3.0%. When the first estimate was released last month, it came in at a much lower 1.4%. When the second estimate dropped this past week, that number was cut in half to 0.7%.4
Source: BEA.
Revisions are typically very minor, maybe 0.1% in either direction. Which is what makes the 0.7% downward revision that much more curious. It looks like a decrease in government spending might have been the big culprit, but this raises a larger question. Could the U.S. economy be slowing faster than we realize? We’ve already seen a significant slowdown in the labor market. There are ongoing concerns about affordability. It’s far too early to suggest that we’re heading towards a recession, but major downward revisions in a data set that we usually don’t see, isn’t a good sign.
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Odds of Zero Rate Cuts in 2026 Soar
For most of the past year, the futures market has been pricing in the expectation of roughly two rate cuts in 2026. That’s consistently been the case despite any changes in the data or short-term market disruptions. That is up until this past week.
Following the ongoing oil price scare, the market is currently pricing in nearly a 40% chance that the Fed Funds rate will remain the same through the end of 2026.5
Source: CME Group.
This kind of action suggests that the market doesn’t think the Iran conflict is going to end soon. If Iran continues to cut off the Strait of Hormuz to cargo ships and oil tankers, it’s not out of the question that the Fed might even need to consider a rate hike later this year.
The Week Ahead
A few themes to watch next week:
In Summary
If GDP growth keeps slowing while inflation accelerates, that could create a nasty stagflationary environment that would very likely take most asset classes down with it. We’re not there yet, but this past week’s major downward revision to GDP should cause some concern. It doesn’t look like oil market volatility is slowing down soon. The markets will be heavily driven by geopolitical events in the near-term.
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