US attacks Iran, market reaction unexpected

U.S. aircraft struck three Iranian uranium-enrichment facilities on Saturday, June 21, in President Trump’s words “completely obliterating” the sites and thrusting Washington directly into the Israel-Iran conflict. Iran replied with missiles on Sunday that targeted, but caused no casualties at the Al Udeid U.S. base in Qatar, while pointedly refraining from closing the Strait of Hormuz, a restraint that reassured energy traders. Brent and WTI crude prices whipsawed, initially spiking, before finishing Monday down about 7%, at $71.48 and $68.51 a barrel respectively, their steepest one-day slide since 2022 as the feared supply shock failed to materialize. Equities quickly regained their footing: by Tuesday, the S&P 500 rose 1.1%, the Dow added 507 points, and the Nasdaq-100 closed at a record high as investors judged the confrontation likely to stay contained. With energy shares lagging but cyclicals and tech leading, gold prices and the Cboe VIX both eased, signaling that the flight to traditional safe havens was already unwinding, even as diplomats rushed to solidify the U.S.–Iran cease-fire.

• It is often the experience that even if you knew the news ahead of time, it would still be difficult to make money in markets
• A good example of this is how markets responded to the US directly striking Iran this past weekend
• If you were to ask most market participants how the markets would react, they would likely have told you that oil would be higher, stocks would be lower, and bonds and gold would rally
• When markets opened on the Monday following the attacks, oil traded lower, stocks higher, and bonds and gold rallied marginally
• The markets seem to react to the contained nature of the strike, the lack of response from Iran and their allies, and the hope of a ceasefire deal

Stocks hit all-time highs before retreating

Stocks vaulted to fresh records on Friday, with the S&P 500 closing at a new high of 6173 and NASDAQ at 20,273. Enthusiasm for artificial-intelligence leaders flared anew after Micron’s upbeat outlook and Nvidia’s march toward a $4 trillion valuation, and Nike’s surprise sales beat helped broaden the advance. The surge was underpinned by a week of dovish Fed sound bites that have lifted the implied odds of a July rate cut to roughly one in five and nudged expectations toward additional easing later this year. A U.S.-brokered cease-fire between Israel and Iran further dialed down geopolitical risk, leaving ten of eleven S&P sectors in the green. With tariff worries receding and liquidity hopes rising, the benchmark index has now clawed back more than 23% from its April lows, convincing many investors that a new bull market is firmly underway.

• While markets today seem to be prone to reflect an outlook viewed through rose-colored glasses, there are important reasons to be cautious
• Fundamentally, markets are not cheap. Looking at the median forecast for earnings for the S&P 500, the market is currently trading at north of 23 times earnings
• Even if projecting 10% earnings growth for 2026, the market is currently trading at north of 21 times next year's earnings
• Both measures are high relative to history
• Earnings season will kick off in two weeks and give us a fresh glimpse into how companies have fared post the tariff announcements during the last quarter
• How tariffs play out is still not clear, and could be a headwind to the economy
• Geopolitical risk is still a big overhang as well
• One of the factors that also plays into the market’s strength is the weakness of the US dollar, which made new recent history lows this week
• If the US dollar were to reverse course, it would be a headwind for the markets

Some Fed officials come out in favor of cuts

Fed Chair Jerome Powell’s two-day Hill testimony (June 24-25) struck a milder note than markets expected, he called policy “well into restrictive territory” and stressed the Fed is “prepared to cut” if the tariff-related bump in prices fades, a nuance investors took as the first hint of an exit ramp. Chicago Fed chief Austan Goolsbee quickly amplified the message, observing that tariffs have had a “more modest impact” than feared and “could open the door to rate cuts,” while erstwhile hawk Michelle Bowman stunned traders by saying a July move “may need to be considered.” San Francisco’s Mary Daly added that a muted tariff effect “could help make the case for a fall cut,” and Boston Fed President Susan Collins said she now expects at least one easing later this year, although July is “probably too soon.” The dovish drumbeat has pushed expectations forward: Fed-funds futures now embed roughly 60 bp of easing by year-end, the two-year Treasury yield has slid to 3.72%, and the broad dollar index is approaching three-year lows, while equities hover near all-time highs. All told, a Fed that began the week preaching patience has ended it with markets pricing a September liftoff for cuts, unless fresh data or tariff shocks force another rethink.

• For a while, markets have been signaling that the Fed is late in lowering rates
• Thus far, Fed officials have kept a unified front in waiting to better understand the impact of tariffs on inflation before cutting further
• Notably, several Fed officials felt compelled to break ranks this week and come out in support of cuts
• There has likely been debate inside the Fed about the current level of interest rates, but it is rare for Fed officials publicly speak contrary to their collective conclusions
• It will be interesting to see if this dynamic helps the Fed cut interest rates at its next meeting in July, which is only being ascribed a 20% probability as of now
• Lower rates would be supportive of asset prices, in particular stocks and real estate, as well as ease the burden of interest expense for the Federal Government

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