After a monster rally in April brought about its best monthly performance since Covid, the US stock market entered the weekend more than 3% above its level before the Iran war, setting new all-time highs. Powered by an army of retail investors who buy every dip and drive the market back up each time it stumbles, the US has apparently become the centre of the financial universe.

What makes it all the more impressive is that this is happening amid a global energy shock, rising inflation and a faltering job market. To account for this apparent anomaly, analysts point to the resilience of the US economy, impressive corporate earnings, and the ongoing boom in artificial intelligence which is driving the profits of chipmakers skywards.

Nevertheless, this rally is fragile, as evidenced by the fall in stocks yesterday in response to events in the Middle East. Meanwhile, if one goes back six months, the market has ebbed and flowed but risen only a few percentage points beyond the peak it hit last October. It has also been fuelled by the latest injection of federal stimulus money, this time in the form of tax refunds from Donald Trump’s Big Beautiful Bill. However, that stimulus effect is expected to peter out for the remainder of the year, so the wind in the market’s sails will blow less strongly.

Nor does this stimulus money come for free. The US government has been running up its debt faster than the economy is growing. That’s making bond investors more jittery than stock investors, and the interest rates on government bonds have risen a third of a percent in just the last six months. This divergence in markets is unlikely to last.

The breadth of the rally is narrow, too, with most of the earnings growth concentrated in a handful of AI players and, latterly, oil companies profiting from the energy shock. The US stock market has largely become a bet on the success of the AI revolution, yet there’s still little numerical evidence that it’s leading to an upsurge in productivity.

All the while, the war in Iran continues. The Strait of Hormuz remains closed, inflation is rising, and real wages are taking the hit. Even though first-quarter GDP rebounded from the slump at the end of last year, once one strips out spending on equipment for the AI boom, growth was flat to negative.

Over the next few weeks, global stocks of oil will run increasingly low. If there is no end to the war and a reopening of the Strait by June, price adjustments will become sharp, and the pain will really hit. Trump has announced a new plan to use the US Navy to escort ships out of the Strait but for now, at least, details remain sketchy and the channel is all but closed. The good news is that both sides of this war, the Iranians and the Americans, are clearly looking for an exit. The bad news is that they have little time before the damage becomes severe.

---

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

---