The stock market’s surge may not be indicative of all the obvious people investors are looking for. The S&P 500 rose 2.9% on Tuesday, its highest since May 12. The jump followed reports that President Donald Trump could end the U.S. campaign against Iran, easing inflationary pressures from soaring oil prices. Oil prices have fallen as well, but US Treasury prices have risen (yields have fallen). But investors may be overestimating how quickly inflation caused by historically high oil prices will subside. “We expect headline inflation to reach nearly 4% year over year in the coming months due to higher energy prices,” said Bank of America economist Stephen Juneau. “We now expect price levels at the end of next year to be 50 basis points above previously expected, due to i) higher food inflation in 2027 due to ongoing fertilizer supply disruptions, and ii) lingering global supply chain challenges,” he added. Still, expectations for the U.S. Federal Reserve’s interest rate hikes subsided this week as hopes for an end to the war. The central bank is now fully expected to keep overnight rates unchanged through the end of the year, according to CME Group’s FedWatch tool. At one point in March, traders were pricing in a 52% chance of a rate hike by the end of 2026. Fed Chairman Jerome Powell also noted that inflation expectations are well anchored, adding that there is no need to raise interest rates at this time. That said, oil prices are still rising compared to early 2026 levels. At the start of 2026, West Texas Intermediate futures were trading around $57 per barrel. It currently trades for about $100 per barrel. Market volatility also remains high. Despite Tuesday’s massive rally, the CBOE Volatility Index (VIX) is still hovering around 25. Maxwell Grinakov, a strategist at UBS, said markets were likely to react poorly to new headlines about the war, but added that “uncertainty remains.” “A very similar situation could occur when a 2022-style volatility environment returns,” he said. “A downtrending market will have unrecognized volatility and skew, making hedging more difficult and investors caught in the middle.” Technical strategists also expect the S&P 500 index to fall before returning to a sustained uptrend.
