The S&P 500 has shown a robust performance so far this year, appreciating by 6% and nearing its all-time high. This upward trajectory has been largely attributed to substantial earnings growth in recent quarters, fueled by significant investments in artificial intelligence technologies. However, some analysts caution that the market may not be as resilient as it appears, highlighting potential threats stemming from geopolitical conflicts and economic policies.
One principal concern has been President Trump’s military engagement in Iran, which has contributed to escalating inflation. The conflict, ignited by airstrikes in late February, has closed the vital Strait of Hormuz—an essential trade artery in the Persian Gulf—resulting in unprecedented disruptions to oil supply, according to the International Energy Agency. The consequent surge in energy prices has been alarming: Brent Crude oil is currently trading at approximately $110 per barrel, a staggering 80% increase since the year’s onset. Likewise, U.S. consumers are now facing an average gasoline price of $4.45 per gallon, up 60% in the same period.
The inflation rate as measured by the Consumer Price Index (CPI) hit 3.3% in March, the highest since April 2024. There are indications that inflation could rise even further, with forecasts from the Federal Reserve Bank of Cleveland suggesting it may reach 5.6% in the second quarter. Such inflationary pressures would likely compel the Federal Reserve to raise interest rates, triggering a shift in investor behavior toward safer assets such as gold and Treasury bonds.
In addition to geopolitical tensions, Trump’s tariffs are another significant factor weighing down the economy. While recent military actions may have overshadowed his trade war, the impacts are still being felt. The Supreme Court recently struck down certain tariffs, yet the average tax on U.S. imports remains at 11.8%, the highest level since the 1940s. Early this year, Trump imposed a 10% global tariff under Section 122 of the Trade Act of 1974, which is on a temporary basis but served to buy time for further investigations that could lead to even more severe tariffs.
Analysts point out that American consumers and companies are the ones bearing the brunt of these tariffs rather than foreign competitors, effectively making it a consumption tax and impeding economic growth. Last year, the GDP growth was just 2%, accompanied by a meager job addition of only 116,000—figures reminiscent of the economic downturn during the pandemic.
Concerns grow that Trump may introduce additional tariffs after the conclusion of trade investigations this summer, coinciding with high oil prices attributable to the Iranian conflict. The combination of these factors could create significant downward pressure on the stock market.
Historical trends raise additional alarms: the S&P 500 has typically seen an average decline of 40% when gasoline prices exceeded $4 per gallon, a threshold now crossed. This pattern, along with present uncertainties, underlines the necessity for investors to maintain caution amid the current economic climate, as predicting the depth of any forthcoming market corrections remains notoriously difficult.
