US Strategy Weekly: Economic Fury

The S&P 500 had its first three-day decline since March 30, and in our view, this pullback was long overdue. There is no denying that the current advance has been remarkable. Yet even as the S&P 500 rallied 11% in the last six weeks, the price-earnings multiples for the S&P 500 remained consistently at 22 times 2026 earnings and 19 times 2027 earnings. Seen another way, the S&P 500 index has increased by a stunning 23.3% since May 19, 2025, while earnings for the S&P 500 have increased an even greater 25.1% YOY in the same timeframe. In short, it has been an amazing time for equity investors, and we believe there will be more good times ahead.

Caution

Nevertheless, we became a bit more cautious last week. Much of this was due to the fact that we feel the Iranian conflict is unlikely to be resolved without more bombing, some of which could impact Iranian energy facilities. If this were to occur it would send energy prices even higher and trigger more inflation fears. In short, things could become worse before they get better.

This week President Trump indicated he was only an hour away from ordering another huge attack on Iran before leaders of Qatar, Saudi Arabia and the United Arab Emirates asked him for time to pursue an agreement over Iran’s nuclear program. However, some market gurus suggest there would have been a pause in the conflict regardless. And this view is supported by the fact that the Senate just advanced a war-powers resolution that could end hostilities with Iran unless President Trump obtains Congress’ authorization.

But if we are right, more bombing would be a negative surprise, and in our opinion, the Senate’s resolution may only serve to hasten President Trump’s decision to act. It should not go unnoticed that the concept that President Trump always “chickens out” or, TACO, has become popular on Wall Street. But this assessment fails to understand how complicated international negotiations are, how divergent geopolitical forces require President Trump to allow Iran and any other nations involved — directly or indirectly — sufficient time to try to negotiate, or what is involved in deciding what the best options are for the US, and last, but far from least, how determined President Trump is to remove the Iranian nuclear threat.

This administration, like most of the world, knows that there is no way to negotiate with the Islamic Revolutionary Guard Corps (IRGC). The IRGC believe that by using stalling tactics they are winning, and that in the end they will always win. Therefore, they have no need or desire to negotiate. But perhaps this recent delay actually helps the US cause. For example, Europol, the law enforcement agency of the European Union, designated the IRGC to be a terrorist group in February, and this week announced a major digital crackdown that led to the removal of thousands of online accounts linked to Iran’s IRGC. It also suspended the group’s primary X account in the EU. This online digital presence was used by the IRGC to communicate, spread propaganda, recruit supporters, and raise funds. These moves by Europol are a blow to the IRGC.

In addition, new US sanctions are targeting Iranian regime currency exchange houses and associated front companies and blocking 19 vessels involved in Iranian petroleum and petrochemicals shipments to foreign customers. In sum, the US Treasury is systematically dismantling Tehran’s shadow banking system and shadow fleet under Economic Fury. The US Treasury also froze nearly half a billion dollars in regime-linked cryptocurrency. What we see is a flurry of action taking place behind the scenes to cut off revenue to Tehran, but in our opinion, these acts are in anticipation of more bombings in the near future. If so, the risk for equities is high in the next few days or weeks.

Inflation Dominated Economic Data

Moreover, the financial backdrop has deteriorated in the last week. The 10-year Treasury note yield touched 4.687% this week, marking its highest level since January 2025. The 30-year Treasury yield hit its highest level in nearly 19 years and West Texas Intermediate futures, while down slightly this week, are still trading well above $100 a barrel. This puts downward pressure on equity valuation models and high interest rates are also a blow to the housing and auto markets which have been under stress this year.

Some housing data showed improvement in April. The pending home sales index, which precedes existing home sales by about two months, increased 3.2% YOY which was the largest annual increase since August 2025, but this followed seven straight months of flat or declining activity. And the data was mixed, increasing in the South, West, and Midwest, but declining in the Northeast. The South had the strongest gain of 4.7% YOY.

Most economic releases have revealed how the conflict with Iran and the rise in energy prices have taken a toll on consumers. In particular, April inflation data was striking. The CPI rose from 3.3% YOY to 3.8%, core CPI rose from 2.6% YOY to 2.8%; final demand PPI rose from 4.3% YOY to 6.0%, the PPI for intermediate unprocessed goods rose from 12.4% YOY to 21.2%. Import prices rose from 2.3% YOY to 4.2%, import prices excluding fuel rose from 2.4% YOY to 2.9% and export prices rose from 5.4% YOY to 8.8%. These reports point to the fact that while inflation is already high, more inflation is in the pipeline.

Retail sales for April looked strong with a headline increase of 4.9% YOY, up from 4.2% in March. But due to higher inflation, real retail sales increased a mere 0.8% YOY, down from 1.3% in March. The best part of retail data was from internet sales, which increased to $326.7 billion in the first quarter of the year, up 9.8% YOY. Even after inflation (which averaged 2.7% in the same period) this was an impressive gain, and internet sales now represent roughly 17% of total retail sales. Many retail companies will be reporting earnings this week as is typical of the end of earnings season. Looking ahead there are no significant economic releases next week, earnings season is ending, and the next FOMC meeting is June 16-17. In short, a dearth of economic data will bring political news to the forefront.    

Earnings Forecasts

For the first time in fifteen weeks the LSEG IBES S&P earnings estimate for 2026 declined and for the S&P/Dow Jones survey forecasts declined for the first time in twelve weeks. See pages 3 and 10. The declines were small, totaling 35 cents for LSEG IBES and 86 cents for S&P/Dow Jones, but the shift may prove significant since the market has reached all-time highs and the financial backdrop is less supportive. We do not believe the market has reached extreme valuations that would require a major setback, but we worry that the market has become too complacent about Iran, the price of oil, and inflation. Moreover, Nvidia Corporation (NVDA – $220.61), the stock at the center of the AI cycle, and key to S&P 500 earnings, reports after the close on Wednesday. The market’s reaction to this earnings report may be a sign of how the broader market will do in the near term.

Gail Dudack

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