Even before the Middle East crisis erupted, the S&P 500’s bullish run was slowing down. There has been no major new catalyst to boost growth: optimism around US trade negotiations with key partners, including China and the EU, has faded, the Fed remains hawkish, reducing the likelihood of rate cuts sooner rather than later.
Moreover, the U.S. deficit isn’t getting any better, even with the DOGE's efforts. It could get even worse if the tax cuts set to expire at the end of this fiscal year are extended, potentially adding another $3.5 to $4 trillion to the deficit. No surprise, then, that 30-year Treasury yields are still hovering around 5% as time goes on.
Although headline CPI rose just 0.1% in May, below the expected 0.2%, and core CPI also came in lower than forecast, it's still too soon to say that the trade wars have had no impact. So far, inflation has stayed low largely because companies rushed to stock up on imported goods before the new tariffs took effect on April 2.
Adding to this, constant shifts in trade policy have fueled more uncertainty. With financial pressures mounting, U.S. consumers are becoming more cautious with their spending. That has left companies with little room to raise prices, facing, for now, the obligation to absorb higher costs, which could weigh on profits.
We will get a clearer picture when the second-quarter results are known. If the results fall short, market confidence could fall. For context, according to FactSet, S&P 500 earnings growth in Q2 2025 is expected to be 4.9% year-over-year. If so, it would be the slowest growth since Q4 2023, when it was 4.0%.
Disinflation could also face setbacks because of geopolitics. If Iran tries to block the Strait of Hormuz — a crucial route that handles about a third of the world’s oil and 35% of liquefied natural gas exports — energy prices would likely skyrocket, pushing inflation up worldwide, much like during the COVID-19 crisis.
So, where do we stand now?
The outlook isn’t exactly optimistic, whether at U.S. financial health or the geopolitical landscape. Add the risk of rising inflation and a tougher Fed response, and the strength of the S&P 500, Nasdaq, and others feels untested. On the other hand, if tensions stay high, the price of gold could keep climbing.
Usually, the dollar also strengthens amid uncertainty, but this time could be different due to trade wars, a shift away from the greenback, and concerns about U.S. debt. For now, however, investors do not seem to expect the worst-case scenario; every dip in the market is still being bought fairly quickly.