I. The War and the President's Speech
Yesterday, we concluded that the S&P 500's pullback bottomed on Monday, just shy of a 10% correction. The S&P 500 fell on Monday to 6343.72, down 9.1% from its January 27 record high. That low could be retested, but we think that yesterday's big rally, combined with the recent drop in bullish sentiment, marked the bottom on Monday. Stocks rebounded yesterday and today on news that the US will end the war soon.
In his speech tonight, President Donald Trump confirmed that the United States could conclude its involvement in the Iran war within the next two to three weeks. He said negotiations are still underway, but threatened once again to obliterate Iran's electric power grid if there is no deal. He also said that if US satellites detect that Iran is rebuilding its nuclear program, American missiles will once again wipe out its efforts. He also stated the US will leave it to other countries to reopen the Strait of Hormuz.
In response to Trump's speech, Brent crude oil rose about $4 a barrel to $105. US stock futures fell 0.8%.
The White House announced on March 25 that Trump's trip to China was rescheduled to May 14. That was a tip-off that the administration was planning to end the war soon.
II. The US Economy and the War
We've been betting on the resilience of the US economy from the beginning of the decade. It has passed several stress tests since then without a recession. If the current stress test ends in two to three weeks, the economy should continue to grow, and so should corporate earnings. In the meantime, the latest batch of economic indicators confirms that the US economy entered the Middle East conflict in solid shape:
(1) The Labor Market. ADP reported Wednesday that US private payrolls rose by 62,000 in March, following a gain of 66,000 in February (chart). Job growth remained concentrated in Education & Health Services but also extended to more cyclical sectors, including Construction and Information. An encouraging development: Job growth among small businesses has begun to improve. In addition, pay gains for job changers rose to 6.6%, the highest reading since October 2025.
(2) Retail sales. Retail sales data for February confirm that American consumers are still shopping. Headline retail sales rose 0.6% on the month, while control group sales, which feeds directly into GDP, gained 0.5% (chart).
(3) GDP. The Atlanta Fed's GDPNow tracker edged down to 1.9% from 2.0% following the release of retail sales data, which reflected a slightly weaker consumer spending contribution to Q1 growth (chart).
(4) Inflation. Energy prices have surged since the war began, and the Cleveland Fed’s Inflation Nowcasting model shows headline CPI might have jumped 0.84% m/m in March and 3.25% y/y, a sharp step up from 2.4% in February.
The good news is that core inflation has not yet been infected by the energy price shock. Core CPI is likely to rise only 0.2% m/m and 2.6% y/y in March, up slightly from 2.5% y/y in February.
An important disinflationary offset to the energy price shock is in the shelter component of the CPI (chart). Apartments List reports that March rents fell 1.7% y/y. The Zillow Observed Rent Index is also moderating. Both are reliable leading indicators for shelter inflation in the official CPI.
(5) Credit. Loan growth at US commercial banks remains very strong, with no sign of a credit crunch emerging. We suspect banks may be stepping up to purchase private loans at attractive distressed prices (chart).
(6) ISM M-PMI. Finally, the national M-PMI has been steady around 52.0 for the past three months (chart).
