Stock Markets Won't Like What's Next as the Iran War Trade Breaks

The Iran war trade is breaking down and stock markets probably won’t like what’s coming next as economic growth fears cut through muddled price signals.

• Stocks drifted higher on some of the lightest volume of the year, with little conviction in either direction
• Priced-in inflation expectations refused to climb even as crude oil rallied, a telling break from the war-era pattern
• Global growth momentum is fading and US tracking estimates are slipping, with Friday’s business surveys the next test

The bellwether S&P 500 popped higher for no obvious reason on some of the thinnest volumes since the turn of the year. The move carried little conviction, with the index bouncing within the congestion it has been stuck in since mid-May without making real headway. The tech-heavy Nasdaq 100 looked much the same. On a session this quiet, the cross-asset picture turned into a muddle worth treating with caution.

A muddled tape with one clear tell

Crude oil pushed higher again, and by the war-era playbook that should have pressured everything else in predictable ways. Instead, the signals scrambled. Stocks rose alongside oil. Treasury bonds softened only slightly and held well above their mid-May lows. And gold, which ought to wilt when oil and yields climb together, rose anyway. None of it hangs together as a clean narrative, and with volumes this light, it would be a mistake to try to force one.

The signal that survived the noise

One thing did cut through, precisely because of what it declined to do. Breakeven inflation rates — the expectations for future inflation embedded in Treasury bond prices — did not rise even as crude rebounded. They have stopped falling and anchored, seeming to be refusing to read the latest oil bounce as inflationary.

This looks like a giveaway. During the war, every uptick in oil fed straight into higher inflation expectations, higher yields, and a firmer dollar. Now the market is looking at the same kind of oil rally and shrugging, perhaps because it senses a stronger force pressing the other way: weakening demand rather than fresh inflation. Tellingly, gold is holding firm, and bonds refuse to break down.

The slowdown is showing up in the data

That read is gaining support elsewhere. Citigroup analytics tracking how global economic data are faring against expectations have been losing momentum since early July. In the US, the Atlanta Fed’s GDPNow model now pegs second-quarter US growth at just 1.7%, down from 2.1% in the first quarter and deteriorating steadily as fresh data lands.

The vulnerability traces to how the US is growing. First-quarter output rose 2.1% almost entirely on the strength of the artificial intelligence (AI) investment boom, with the consumer contributing next to nothing by comparison. The last two times household spending was this feeble, in the first quarters of 2022 and 2025, gross domestic product (GDP) shrank outright, hinting that the AI build-out is the only reason growth is positive at all. That leaves the economy leaning on a small engine of demand while the largest one – the consumer – idles.

This makes for a vicious cycle. Growth powered by a narrow slice of the economy demands that sector grow at neck-snapping speed, fueling a churn that generates inflation, squeezing consumers further. Households are five times larger than investment as a share of GDP, so even modest retrenchment can swamp the boom and drag growth into reverse.

Friday’s surveys are the real test

That makes July’s S&P Global purchasing managers index (PMI) surveys – a timely proxy for global growth trends – the week’s marquee event risk. The contrast to watch is instructive. The US is still expanding, its factories humming and its service sector holding up. The Eurozone has stalled: manufacturing is growing, but its far larger service sector is in contraction mode, dragging the whole economy to a standstill. That is precisely the template the US risks following if its own consumer-driven services begin to buckle.

None of this resolves in a single quiet session, and the markets are not turning all at once. Still, the split is telling: gold and bonds are leaning one way, stocks and oil another, and the quiet refusal of inflation expectations to follow crude higher suggests something new is coming together.

The story that has driven markets all year appears to be shifting from war to the health of the global economy. Crude oil may keep swinging on the next headline out of the Persian Gulf, yet those swings may soon count for little. If the US consumer buckles and brings the economy to its knees, a painful reckoning for the stock market seems inescapable.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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