Is Wall Street About to 'Tear Up Forecasts' Again? U.S.-Iran Conflict Reignites, Markets Reprice Inflation and Rate Hike Risks

Markets had initially expected the second half of the year to bring a rare 'tailwind environment'—falling oil prices, cooling inflation, and continued AI-driven corporate earnings growth—sufficient to sustain the bullish stock market trend. However, the recent escalation of military conflict between the U.S. and Iran has swiftly disrupted this narrative, forcing Wall Street to confront once again a familiar yet thorny question: could energy prices once again become the biggest variable in global financial markets?

Analysts at Societe Generale captured market sentiment with a simple phrase: 'Here we go again,' reflecting investor frustration. As Middle East tensions escalate rapidly, markets have resumed pricing in 'war risk,' and previously cooling oil prices and inflation expectations are now showing signs of reversal.

Middle East Tensions Flip Market Expectations—Oil Returns to War Mode

Previously, it was widely believed that after the ceasefire agreement took effect, global oil supply would gradually normalize, possibly even leading to oversupply. Low oil prices were expected to ease the burden on consumers, reduce corporate operating costs, and further alleviate capital expenditure pressures from AI infrastructure investments.

However, the U.S. and Iran have recently launched a new round of military strikes against each other. U.S. President Trump announced the ceasefire agreement has been terminated and warned that further military escalation, including a potential naval blockade on Iran, cannot be ruled out—reigniting market fears of a global oil supply shock.

As a result, international oil prices surged on Wednesday. Brent crude futures jumped 5.2%, closing at $78.02 per barrel—the highest level since the 60-day ceasefire agreement was reached in June. U.S. West Texas Intermediate (WTI) crude futures also rose 4.4%.

Jorge León, Head of Geopolitical Research at energy consultancy Rystad Energy, noted that tanker traffic through the Strait of Hormuz has nearly stalled, a clear reflection of market risk concerns—even more telling than official statements from Washington and Tehran.

Additionally, the U.S. Treasury recently revoked exemptions allowing Iran to export crude oil, further fueling market anxiety over supply disruptions.

Rising Energy Costs Put Fed's Inflation Fight to the Test

Beyond the Middle East conflict, Ukraine's ongoing attacks on Russian refining facilities, coupled with Russia's announcement of a temporary ban on diesel exports, are placing simultaneous pressure on global fuel markets.

U.S. diesel futures surged 11% on Wednesday, with year-to-date gains reaching 72%. Gasoline futures have risen even more sharply, up 82% this year—making energy prices a renewed major burden on American household living costs.

According to the latest released minutes of the Federal Reserve's June meeting, U.S. inflation remains elevated, with recent signs of renewed upward pressure. Officials believe high oil prices, tariff costs, and increased demand for raw materials and labor driven by AI infrastructure investments continue to push up price pressures.

As a result, interest rate futures now reflect over an 80% probability that the Fed will raise rates at least once by year-end, prompting markets to re-adjust their expectations for monetary policy.

AI Investment Costs Emerge as a New Concern

Beyond energy costs, markets are also reassessing the sustainability of the AI investment boom.

Over the past year, tech giants like Amazon and Oracle have funded AI data center construction through massive bond issuances. If interest rates remain high or rise further, corporate financing costs will increase accordingly. Markets are now questioning whether the massive capital expenditures driven by AI can still generate sufficient returns.

Although risk-averse sentiment has returned, many investment institutions believe this situation resembles the earlier Middle East conflict this year rather than the start of a new prolonged crisis.

Tyler Rosenlicht, Head of Natural Resources Equities at Cohen & Steers, said the market had always expected negotiations to be bumpy—the current shock is simply larger than anticipated, making it difficult for investors to regain confidence in the short term.

Some asset managers believe markets are still in a wait-and-see phase. The key question remains whether this military escalation is just a temporary spike in negotiations or will evolve into a prolonged regional confrontation.

Robert Edwards, Chief Investment Officer at Edwards Asset Management, noted that the current market reaction closely mirrors the early stages of the Iran conflict, when oil prices spiked and both stocks and bonds fell—but a quick rebound followed. Therefore, if equity markets continue to decline over the coming weeks, it could present new strategic entry opportunities.

Others worry that even a moderate rise in energy prices could prompt the Fed to delay rate cuts or even consider hiking again, thereby increasing corporate financing costs—particularly for large tech firms relying on debt to fund AI infrastructure, which could become the next focal point for market scrutiny.

Overall, the 'perfect scenario' that markets had hoped for—low oil prices, low inflation, and AI-driven growth—is now being tested by geopolitical risks in the Middle East. Future oil price trends, the Fed's policy direction, and whether AI investments can continue to support corporate earnings will be the three key factors shaping the next phase of global financial markets.

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