Both the S&P 500 and the Nasdaq closed at new all-time highs last week, driven by three main factors, none of which, however, is as clearly bullish as the headlines suggest.
Starting with the labor market surprising on the upside, unemployment indeed remained at 4.3%, and the economy added 115,000 jobs, well above forecasts of 65,000, though these numbers could still be revised later. Even if they are not, with inflation still a concern, this gives the Fed another reason to hold off on cutting rates. Swapping Jerome Powell for Kevin Warsh would probably not change much.
As for a federal court ruling overturning Trump’s 10% tariffs, which had been introduced to replace earlier measures deemed illegal, this does not eliminate the trade war. Even if it becomes harder for Trump to impose tariffs unilaterally, his team will likely continue seeking alternative ways to do so. Thus, it is too early to claim that one of the key inflationary risks is going away anytime soon.
Finally, the main driver of sentiment this week was hope for a breakthrough in peace talks between the U.S. and Iran. Oil prices fell sharply after reports that both sides were discussing a one-page memorandum that could include a ceasefire, the gradual reopening of the Strait of Hormuz, and further negotiations over Iran’s nuclear program.
In practice, however, Trump rejected Iran’s proposal, calling it “unacceptable,” while the Iranian Foreign Ministry accused the U.S. of continuing to make “unfounded demands.” Meanwhile, Israeli Prime Minister Benjamin Netanyahu stated on Sunday that the war with Iran “is not over,” as both the U.S. and Israel continue to try to curb Tehran’s nuclear ambitions.
So, does this mean a market crash is inevitable?
The conditions are certainly there, but investors are staying optimistic over the longer term. They believe that sooner or later these geopolitical risks will fade, fueling dip-buying.
Now, the longer these risks persist, the greater the potential damage to the U.S. economy, and eventually markets will no longer be able to ignore that reality.
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