The S&P 500 (SNPINDEX: ^GSPC) has added 6% year to date and currently trades near its record high. That momentum has been driven by strong earnings growth in recent quarters, which itself has been supported by prodigious investments in artificial intelligence.
However, investors may be overestimating the stock market’s resilience. President Trump’s tariffs and military operations in Iran pose serious threats to the U.S. economy. Last week, Moody’s chief economist Mark Zandi said, “We’d likely be in a recession already if not for the AI investment-driven boom.”
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Here’s what investors should know.
President Trump’s military operations in Iran have driven inflation higher
Trump’s decision to strike Iran in late February has spiraled into the largest oil supply disruption in history, per the International Energy Agency. The conflict has not only closed the Strait of Hormuz, a critical shipping route in the Persian Gulf, but it has also damaged infrastructure. Ramping up oil flows to pre-war levels could take months.
Meanwhile, energy prices have increased dramatically. Brent Crude oil, an international benchmark, currently costs $110 per barrel, up 80% since January. And the average price per gallon of regular gasoline in the U.S. is $4.45, up 60% since January, according to the Energy Information Administration.
CPI inflation hit 3.3% in March, the highest level since April 2024, and will likely accelerate further as elevated energy prices percolate the economy by raising transportation and manufacturing costs. Indeed, a forecasting tool from the Federal Reserve Bank of Cleveland shows CPI inflation trending to 5.6% in the second quarter.
If that projection proves accurate, the Federal Reserve would almost certainly raise interest rates, which would likely trigger a flight to safety. Investors hoping to protect their portfolios from an economic downturn would sell stocks and buy safe-haven assets such as gold and Treasury bonds.
President Trump’s tariffs are damaging the U.S. economy
The Iran war has stolen focus from Trump’s trade war, but it remains a source of concern. Earlier this year, the Supreme Court struck down certain tariffs, but tariffs still in effect have raised the average tax on U.S. imports to 11.8%, the highest level since the 1940s, according to the Budget Lab at Yale.
