The Iran conflict and global energy: Sixty-three days in, the war in Iran has stopped feeling like a crisis and started feeling like a new normal. The closed Strait of Hormuz has produced what Reuters is now calling the largest disruption to global energy supplies in history. Brent crude cross $120 per barrel this week, more than 65% above pre-war level. In a scenario where prices hold here through year-end, analysts project global growth falling to between 1.5% and 2%, and headline inflation climbing toward 5%. Stagflation also remains a real possibility.
The pain is not distributed evenly. Europe is getting hit hard, as eurozone inflation rose to 3% in April while Q1 GDP growth came in at a mere 0.1%. Much of Asia is in a similarly tight spot, given how heavily the region depends on Gulf oil moving through the Strait.
As the world’s largest oil and gas producer, the U.S. is less exposed than Europe or Asia, and the growth impact here is considerably smaller. But domestically produced energy does not insulate the U.S. from globally priced oil. AAA data puts the national average for regular gasoline at $4.23 per gallon as of April 29th, up 34% from a year ago and the highest level since the summer of 2022.
In our view, energy costs are likely to stay elevated, inflation will remain sticky, and the Fed’s path back to 2% is more complicated than it was six months ago. We are factoring in all of these variables into how we think about our clients’ purchasing power, income needs, and exposure to inflation risk in their portfolios.
Tech earnings and the AI build-out: Whatever the macro headings suggest, American companies are posting strong results. S&P 500 companies are currently reporting their highest average profit margins in more than 15 years, and the index is trading near all-time highs despite the war. There is a tangible gap between sentiment and market performance.
Wednesday’s reports from Alphabet, Meta, Amazon, and Microsoft all beat Wall Street’s estimates, but the market’s reaction was mixed. The bar for these companies is simply very high. The Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla) account for roughly a third of the S&P 500’s total weight. What happens to these stocks matters to nearly every portfolio.
Analysts attribute the April rally to investors realizing that these stocks had gotten cheap relative to their forward earnings, a byproduct of the Iran-driven sell-off. Some recent turbulence around OpenAI’s reported revenue shortfalls has introduced caution, but cautious optimism remains the dominant mood. Fed Chair Powell also noted this week that U.S. growth is on track to exceed 2% this year, with data center investment showing up as a meaningful contributor.
We think the AI investment cycle has more room to run. What has changed is that the market now wants proof. Capital expenditure has to translate into revenue, and that test will play out over the next several quarters. The concentration of the S&P 500 in a handful of names cuts both ways. We want clients to benefit from this growth story while staying diversified, so that a stumble in tech does not define the year.