The Art of the Iran Deal

After nearly four months of war, the United States and Iran reached an agreement to halt hostilities and reopen the Strait of Hormuz—a breakthrough that, by the weekend, had reset the entire backdrop for investors. But as any negotiator knows, the deal that looks inevitable in hindsight rarely feels that way while it is being struck. Markets spent the week lurching between the threat of escalation and the promise of resolution, and the swings were violent.

The path there was anything but smooth. Stocks fell hard at midweek as headlines pointed to fresh U.S. strikes on Iran, and a hotter-than-hoped inflation report landed, with the Dow Jones Industrial Average (Dow) shedding roughly 900 points in a single session. By Thursday and Friday the mood flipped as both sides signaled a deal was near, and the major averages rallied to recover the week’s losses. For the week, the S&P 500 (S&P) gained about 0.7% to close near 7,431, while the Nasdaq Composite and the Dow each added roughly 0.7% as well—solid weekly figures that mask just how turbulent the ride was beneath the surface.

The deal is the single most important development for investors in months. Mediated by Pakistan and set to be formally signed Friday in Switzerland, the agreement calls for an immediate halt to hostilities, the removal of the U.S. naval blockade and the reopening of the Strait of Hormuz—the chokepoint through which a large share of the world’s oil supply passes. The market reaction was swift. Crude oil, which traded above $100 per barrel earlier this year, fell roughly 6.6% on the week to around $84 and continued to slide as the deal was confirmed. A final round of nuclear negotiations is expected to run over the next 60 days, so the situation is not fully resolved. But the reopening of the strait removes a tail risk that had been hanging over energy markets and, by extension, the market’s outlook for inflation data.

The irony is that last week’s inflation data captured the old regime, not the new one. The Consumer Price Index (CPI) rose 0.5% in May and 4.2% from a year earlier—the highest annual reading since April 2023 and the first-time headline inflation has crossed 4% in more than three years. The culprit was energy: it accounted for more than 60% of the monthly increase, gasoline was up more than 40% from a year ago and the broad energy index has climbed over 23% in the past 12 months. Strip out food and energy, though, and the picture was far calmer—core CPI rose just 0.2% on the month, below expectations, and 2.9% from a year ago.

The Producer Price Index (PPI), released a day later, told a similar story. Wholesale prices jumped 1.1% in May, pushing the annual rate to 6.5%, the highest since November 2022. Final demand goods posted their largest monthly increase in the history of the series dating back to 2009, with roughly 80% of that move traced to a double-digit jump in energy. Yet core PPI, like core CPI, came in cooler than expected at 0.4%. The through-line is clear: this was an energy shock, not a broad reacceleration of underlying inflation. With crude now falling sharply, there is a reasonable case that May marked the peak for headline inflation this cycle.

The labor market, meanwhile, refuses to crack. May payrolls rose 172,000, more than double the roughly 80,000 economists expected, and the prior two months were revised higher. The unemployment rate held at 4.3% for a third straight month. The one soft spot was the wages: with average hourly earnings up 0.3% on the month and prices up 0.5%, real wages actually slipped—a reminder that energy-driven inflation is eating into household purchasing power. Weekly jobless claims rose to 229,000, a three-month high, but remain low by any historical standard. Taken together, the data describe an economy that is still expanding and still hiring, even as consumers feel pinched at the pump.

Against that backdrop came the week’s marquee event: the public debut of SpaceX. Priced at $135 per share for a valuation near $1.75 trillion, the offering raised about $75 billion—making it the largest IPO in history by a wide margin, more than 2.5 times the previous record set by Saudi Aramco. Shares opened around $150 and jumped nearly 20% on their first day of trading under the ticker SPCX. The enthusiasm is a vivid illustration of a theme we have returned to all year: an enormous appetite for the handful of companies tied to artificial intelligence (AI) and frontier technology that now drive a disproportionate share of both index returns and earnings growth. It is worth noting the offering was not without skeptics—some analysts called the valuation rich, and the dual-class structure leaves founder Elon Musk with more than 80% of the voting power. For long-term investors, the lesson of IPO history is that first-day pops and durable returns are very different things.

All of this lands on the desk of the U.S. Federal Reserve (Fed) at an awkward moment. The Federal Open Market Committee (FOMC) meets Tuesday and Wednesday, and Wednesday’s decision will be the first for new Chair Kevin Warsh. Markets widely expect the Fed to leave its target range unchanged at 3.50% to 3.75%; in fact, futures have at times leaned toward a rate hike being more likely than a cut—an extraordinary shift from where expectations sat at the start of the year. The 4.2% inflation print and resilient jobs data give the Fed every reason to stay patient. But the sudden drop in oil prices complicates the calculus: if the energy shock is genuinely unwinding, the inflation that has kept the Fed on hold may fade faster than feared. The updated “dot plot” of rate projections and Warsh’s first press conference will be scrutinized for any hint of which way the committee is leaning.

A framework is not a signed treaty, and a ceasefire is not a lasting peace—the hard part of any deal lies in the details still to be negotiated, and a 60-day window remains before the nuclear terms are settled. Markets enter this week having priced in the optimistic case: that the war is ending, that energy prices keep falling and that inflation peaked in May. The labor market is holding, and risk appetite is plainly alive. The open questions are whether that optimism proves durable and how a new Fed Chair chooses to navigate a sudden descent in energy prices. The art of any deal, after all, is in making it stick.

Looking forward to this week,all eyes turn to Wednesday’s Fed decision and Chair Warsh’s first press conference, along with the accompanying economic projections. Investors will also watch a busy slate of housing, manufacturing and consumer data, the formal signing of the U.S.–Iran agreement on Friday, and earnings from FedEx, Kroger, Lennar and Accenture. Note that U.S. markets will be closed Friday, June 19, in observance of Juneteenth.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market.