The on-again/off-again deal with Iran is, well, off again. As expected, this has become the dominant driver in markets across all asset classes. Of course oil is the primary mover, but since energy in an input into all sectors of the economy, we are seeing worries of inflation come back to life, adding to equity and bond market skittishness.
Equity investors are again questioning the AI trade, punishing chip makers this past week. This mainly came from Meta announcing their intent to sell their excess compute capacity for other AI model-makers. This is the first indication that total chip supply may have caught up with demand — if a major model-maker has more compute than it needs, then maybe the “perpetual scarcity” narrative is unwinding?
The resurgence in oil price, and the open-endedness of the Iranian conflict, has pushed our probability of stagflation a bit higher along with the policy-error recession. Bottom line, we see about a 48% chance of a bad economic outcome over the next 12 months, and about a 52% chance of a “growth as usual” outcome. We do see some important data on employment this week, and we will be watching that closely.
Overall, we are positive on the economy. We are watching closely for signs of weakness, but those signs are muted at the moment. Earnings are very strong, with the S&P 500 expected to deliver 25% earnings growth over this time last year! When earnings start to falter, that is when investors should begin to worry.
Chart of the Week
WTI crude oil is about the best proxy for how investors feel the Iranian conflict is going as this week’s chart demonstrates. We can clearly see prices following the events, and reflecting a “wartime premium” over the $70/barrel prices seen in February.
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