The memorandum of understanding between the U.S. and Iran collapsed in early July, leading to a resumption of hostilities from both sides. For now, the Strait of Hormuz is again effectively closed to commercial traffic. The U.S. has reinstituted its blockade of Iranian ships and most other ships are avoiding the Strait and the prowling Iranian drones. There is now a stalemate in the Strait, with neither side having good options for prevailing militarily nor a sufficient appetite for substantive negotiations.
Oil Prices Reflect Optimism
Many analysts have been warning for months that an extended closure of the Strait would eventually result in a calamitous rise in the price of oil. However, so far, such warnings have been off the mark. Through a combination of lower consumption, oil exports being rerouted overland through Saudi and Syria and the drawing down of countries’ strategic reserves, the calamity has yet to arrive. Today Brent crude is trading at $83, up around $12 per barrel from the beginning of the month, but not near crisis levels. It seems the oil market continues to expect a resolution to the Hormuz crisis in the near term. However, a solution to the crisis seems, in political terms, as far away as it has been since the start of the war. The Iranian regime simply needs to survive and to maintain its ability to threaten traffic in the Strait to keep lots of leverage in negotiations. Without a large-scale U.S. invasion (which would seem highly unlikely) the Iranian regime is unlikely to be dislodged and will thus remain in a strong bargaining position—for now and into the future. Iran’s Gulf neighbors apparently have realized this, as Saudi Arabia, Iraq, Qatar and Oman all sent representatives to the funeral of Ayatollah Khamenei last week—even though Iran has been actively attacking their countries!
The Stock Market Cares About AI Spend, not Oil (at least for now)
As mentioned in our previous letter, we think the U.S. stock market is behaving as though there will be a resolution over Iran sometime soon. Stocks delivered strong performance in the first half of the year, rewarding investors who stayed the course after war broke out. Right now stocks are trading more on incremental news about the strength of the AI spending cycle, and do not seem to be overly bothered by $80 oil.
Second Quarter Earnings will be Strong
The second quarter earnings season is now underway, and the largest financial companies have largely reported very strong results, indicating a resilient economy and a resilient consumer. Technology, which has led the way for most of the year, has pulled back in recent days. The semiconductor sector, in particular, has given up some ground—but it is also the sector that has run up the most this year. Next week, 80 of the S&P 500 companies will report earnings, and analyst are broadly expecting very strong growth. Overall, corporate earnings are set to grow around 24% in the second quarter, well above a sustainable rate. Much of the growth is coming from the data center buildout, which some analysts contend has added as much as 1% the U.S. GDP growth. While the AI buildout is a strong investment theme, the market is also now very reliant on things working out for companies’ investments into AI. Should it become clear that there is an overbuild of computing capacity happening, well . . . stocks would not like that news at all . . .
Murky Inflation Data for the New Fed Chair
The market has gone from expecting at least three Fed interest rate cuts in 2026 to expecting none—possibly even a hike. Oil prices have been pushed up because of the Iran war, and those costs flow through to many products, keeping inflation levels elevated. Also, the longer Hormuz is closed, the longer energy prices will remain high and feed inflation into the inputs of many companies’ products. New Fed Chair Kevin Warsh has been dealt a tough hand in that he is expected to keep inflation down despite the exogenous Iran war shock, and to keep unemployment low.
As always, we welcome your comments and feedback.
Please contact us know if there is anything you would like to discuss about your investments or the markets.
Photo AI generated in Canva
Stalemate in Hormuz . . . but not in the Markets
The memorandum of understanding between the U.S. and Iran collapsed in early July, leading to a resumption of hostilities from both sides. For now, the Strait of Hormuz is again effectively closed to commercial traffic. The U.S. has reinstituted its blockade of Iranian ships and most other ships are avoiding the Strait and the prowling Iranian drones. There is now a stalemate in the Strait, with neither side having good options for prevailing militarily nor a sufficient appetite for substantive negotiations.
Oil Prices Reflect Optimism
Many analysts have been warning for months that an extended closure of the Strait would eventually result in a calamitous rise in the price of oil. However, so far, such warnings have been off the mark. Through a combination of lower consumption, oil exports being rerouted overland through Saudi and Syria and the drawing down of countries’ strategic reserves, the calamity has yet to arrive. Today Brent crude is trading at $83, up around $12 per barrel from the beginning of the month, but not near crisis levels. It seems the oil market continues to expect a resolution to the Hormuz crisis in the near term. However, a solution to the crisis seems, in political terms, as far away as it has been since the start of the war. The Iranian regime simply needs to survive and to maintain its ability to threaten traffic in the Strait to keep lots of leverage in negotiations. Without a large-scale U.S. invasion (which would seem highly unlikely) the Iranian regime is unlikely to be dislodged and will thus remain in a strong bargaining position—for now and into the future. Iran’s Gulf neighbors apparently have realized this, as Saudi Arabia, Iraq, Qatar and Oman all sent representatives to the funeral of Ayatollah Khamenei last week—even though Iran has been actively attacking their countries!
The Stock Market Cares About AI Spend, not Oil (at least for now)
As mentioned in our previous letter, we think the U.S. stock market is behaving as though there will be a resolution over Iran sometime soon. Stocks delivered strong performance in the first half of the year, rewarding investors who stayed the course after war broke out. Right now stocks are trading more on incremental news about the strength of the AI spending cycle, and do not seem to be overly bothered by $80 oil.
Second Quarter Earnings will be Strong
The second quarter earnings season is now underway, and the largest financial companies have largely reported very strong results, indicating a resilient economy and a resilient consumer. Technology, which has led the way for most of the year, has pulled back in recent days. The semiconductor sector, in particular, has given up some ground—but it is also the sector that has run up the most this year. Next week, 80 of the S&P 500 companies will report earnings, and analyst are broadly expecting very strong growth. Overall, corporate earnings are set to grow around 24% in the second quarter, well above a sustainable rate. Much of the growth is coming from the data center buildout, which some analysts contend has added as much as 1% the U.S. GDP growth. While the AI buildout is a strong investment theme, the market is also now very reliant on things working out for companies’ investments into AI. Should it become clear that there is an overbuild of computing capacity happening, well . . . stocks would not like that news at all . . .
Murky Inflation Data for the New Fed Chair
The market has gone from expecting at least three Fed interest rate cuts in 2026 to expecting none—possibly even a hike. Oil prices have been pushed up because of the Iran war, and those costs flow through to many products, keeping inflation levels elevated. Also, the longer Hormuz is closed, the longer energy prices will remain high and feed inflation into the inputs of many companies’ products. New Fed Chair Kevin Warsh has been dealt a tough hand in that he is expected to keep inflation down despite the exogenous Iran war shock, and to keep unemployment low.
As always, we welcome your comments and feedback.
Please contact us know if there is anything you would like to discuss about your investments or the markets.
Photo AI generated in Canva
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Peter Thoms, CFA, MBA