Add Bunker Busters and Stir

By Pete Biebel, Senior Vice President, Senior Investment Strategist

For the last two months, the stock market has savored a very pleasing combination of a still simmering economy, pared inflation and zesty earnings growth. That amalgamation created a jambalaya that had investors gobbling up stocks and lifting the major averages back to within a couple percentage points of their record highs. But now, this weekend’s U.S. “Midnight Hammer” attack on Iranian nuclear facilities has created an all-new fine kettle of fish. Will the increasing geopolitical tensions continue to be ignored by the market, or will they be a recipe for disaster?

Over the last two weeks, there have been signs that the bulls’ appetite may have been sated. The pie-in-the-sky rallies in the early weeks of the rebound have gone flat. Upward momentum has been reduced to near zero. The S&P 500 Index (SPX) just had its narrowest two-week range of the year so far. And participation in the rallies is also thinning. Last week, fewer than 30% of the 503 stocks in SPX had a gain for the week.

Last week started out well enough. The absence of any significant escalation in the Israel/Iran conflict over the previous weekend whetted the bulls’ hunger, and they gobbled up stocks on the market’s opening last Monday. The major indices all hit what would be their highs of the holiday-shortened week just over an hour into the session. But those highs fell well short of the highs in the previous week. The averages slowly trended lower over the remainder of the day, giving back between one-quarter to one-half of the opening gains.

The appetite for stocks diminished considerably on Tuesday after the increasing threat of disruptions in the Mideast touched off a spike higher in crude oil prices. The price of front-month crude oil futures percolated up from near $71 late Monday to over $73 per barrel by Tuesday morning. Stocks suffered just moderate losses that morning, but as fuel prices continued higher through the day, stocks tanked. Crude ended the day near $75, and SPX and the Dow Jones Industrial Average (DJIA) ended the day near their previous Friday closing levels, having given back all of Monday’s gain. The energy sector poached about a 1% gain for the day when the major averages all had losses. One group of stocks that got flambéed on Tuesday was solar stocks. Shares of several solar companies went down in flames after revised versions of the Senate budget bill maintained a full phase-out of solar and wind-energy tax credits.

On Wednesday morning, stocks marinated at slightly higher price levels. Traders were walking on eggshells, awaiting the U.S. Federal Reserve (Fed) policy announcement and Fed Chairman Jerome Powell’s press conference. The 2:00 PM EDT announcement (that, as expected, the Fed would not reduce its benchmark overnight lending rate) did not inspire a significant market reaction. However, Powell’s comments at the 2:30 press conference did. When the Fed chair stated that they “expect a meaningful amount of inflation to arrive in the coming months,” the averages dropped like a hot potato to new lows for the day before stabilizing.

Where the meat-and-potato type stocks had a bland Wednesday, the top banana group that day was cryptocurrency-related companies. News that the Senate passed the Genius Act, a bill to regulate stablecoins, lit a fire under crypto stocks. Cryptocurrency exchange Coinbase Global (COIN) brought home the bacon with a 16% gain; it was the best of the S&P 500 stocks that day.

On Friday morning, it was the tech stocks (especially semiconductor companies) that got fried. A Wall Street Journal article that morning reported that, “A U.S. official told top global semiconductor makers he wanted to revoke waivers they have used to access American technology in China, people familiar with the matter said, a move that could inflame trade tensions.” Tech stocks sold off sharply, dragging the overall market lower with them. The averages gave up most, if not all, of their gains for the week. SPX ended the week with a net loss, but it was small potatoes, down 0.15%. DJIA ended the week just a pinch higher, +0.02%. The NASDAQ Composite Index (COMP), despite the late-week weakness in semiconductor stocks, was able to bear fruit, gaining 0.21% for the week. Energy and financials were the strongest sectors last week, gaining 1% and 0.8%, respectively. Again last week, the healthcare sector was the poorest underperformer, down about 2.5%.

The risk of expanding geopolitical conflict is like garlic in a recipe. It seems to be omnipresent, and the market can easily stomach it in moderate amounts. But too much will make the entrée unappetizing. There’s no way of knowing how much it’s likely to escalate in the days and weeks ahead, but it is already approaching unsavory levels. As I write this on Sunday evening, stock index futures are just 0.3% to 0.5% lower. Not bad, but it does indicate increasing concern, and there could be big swings overnight. Perhaps more significant is that crude oil futures have jumped another 2% or so.

Don’t tell the chef, but the three main ingredients (cited in the opening paragraph) that have made the stock market so tasty lately might be in short supply going forward. Updates on inflation statistics in the months ahead are likely to tick higher, even without the impact of tariffs and higher energy prices. That’s just because the year-ago numbers that will be coming off the year-over-year data were so low. Higher energy prices, higher interest rates and an increasing tariff impact may eventually erode economic growth. What if, while inflation is reheating, we stir in reductions in economic activity and earnings growth?

SPX ended last week near 5968, still within a couple percentage points of its record high. So, just a little less bad news could provide an environment in which the index could see a marginally higher high. But if the news gets bad and the market heads south, SPX could fall into the 5700 – 5800 area without doing any long-term technical damage. Falling below 5600 would leave a bad taste.

While it’s likely that geopolitical news will trump economic data this week, there are several reports that could trigger a market reaction if they come in too much above or below expectations. First, watch the continuing claims report Thursday morning. That number has been gradually inching higher; a big jump over 1.95 million would be a signal to expect an uptick in the unemployment rate next month. Second, the durable goods number that same morning is expected to swing from a big minus to a big plus. That leaves a lot of room for disappointment. Finally, Friday morning’s personal consumption expenditures price index, which is considered to be the Fed’s preferred measure of inflation, could roil the markets if the data comes in too hot. Also, note that the annual rebalance for the Russell indices is on Friday. We’re likely to see a very big volume day and will probably also see some big swings in small stocks that are added to, or deleted from, one of the indices.

Economic Calendar (6/23/25 – 6/27/25)		Previous	Consensus
Monday 6/23/2025	U.S. Services Flash PMI, June	53.7	53.0
	U.S. Manufacturing Flash PMI, June	52.0	51.5
	Existing Home Sales, May, SAAR	4.0mm	3.95mm
Tuesday 6/24/2025	Case-Shiller Home Price Index, April, M/M	-0.1%	-0.2%
	Consumer Confidence, June	98.0	99.1
Wednesday 6/25/2025	New Home Sales, May, SAAR	743K	689K
Thursday 6/26/2025	Initial Jobless Claims	245K	248K
	Continuing Claims	1,945K	1,945K
	Durable Goods Orders, May, M/M	-6.3%	+6.5%
	Core Durable Goods Orders, May, M/M	-1.3%
	GDP (second revision), Q1, SAAR	-0.2%	-0.2%
	Pending Home Sales, May, M/M	-6.3%	0.0%
Friday 6/27/2025	Consumer Sentiment, June	60.5	59.5
	Personal Income, May, M/M	+0.8%	+0.3%
	Personal Spending, May, M/M	+0.2%	+0.1%
	PCE Price Index, May, M/M	+0.1%	+0.1%
	PCE Price Index, May, Y/Y	+2.1%	+2.3%
	Core PCE Price Index, May, M/M	+0.1%	+0.1%
	Core PCE Price Index, May, Y/Y	+2.5%	+2.6%

 

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