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Summary

• Five major economic crosscurrents include headwinds from the Iran war, Federal Reserve policy, and higher rates, alongside tailwinds from artificial intelligence and economic resilience.
• Four scenarios for the Iran conflict are a managed off-ramp (50% probability), shadow war (25%), severe tail (15%), and regime change (10%).
• Coercive diplomacy blends escalation and negotiation to shape terms, with a fragile pause in strikes but elevated risks from blockades and proxy activity.
• Oil prices rose from $67 to $91 per barrel since the war began, while natural gas increased from $2.85 to $2.99.
• The S&P 500 gained 12.3% since the war began, whereas the Bloomberg U.S. Aggregate bond index fell 4.5%.
• Inflation expectations vary by political affiliation, with Republicans forecasting 2.7% and Democrats forecasting 3.6% over the next five years.
• Fed funds futures shifted from pricing one rate cut through 2027 to pricing four rate hikes following the conflict.
• The Congressional Budget Office estimates a $1.9 trillion deficit, pushing total U.S. debt over $40 trillion.
• Unfunded retirement and health promises add another $97 trillion to the fiscal outlook, with trust funds depleting in 2032 and 2033.
• Data center construction spending continues to rise while non-data center construction spending has fallen.
• The personal saving rate dropped from 4.4% to 4.1%, funding nearly all real spending growth.
• Service and manufacturing firms are retraining employees to use AI rather than laying off workers.
• The Federal Reserve raised the target rate by 25 basis points to 3.75%-4.00% in a unanimous 12-0 vote, the first increase since July 2023.
• The 10-year Treasury yield rose to 5.2%, and the 1-year breakeven inflation rate fell to 2.6%.
• The S&P 500 P/E ratio is 14% above its 10-year average on a cap-weighted basis but 5.2% below average on an equal-weighted basis.
• Historical data shows markets tend to rally after midterm elections as event risk passes.
• Earnings forecasts for 2026 were revised upward to 33.6% growth from 15.2% at the start of the year.