US CPI: Are Stock Markets Immune as the Iran War Fuels Inflation?

The US Consumer Price Index (CPI) for April is projected to rise to 3.7% year-over-year, the highest since May 2024, as the full impact of energy price shocks from the US-Iran conflict begins to appear in economic data. Stock markets, which have rallied narrowly with tech and AI-related sectors leading gains, may face pressure if inflation fears intensify, particularly as Treasury yields rise and bond prices retreat to wartime lows. The S&P 500 set a record high last week, but technical indicators suggest weakening momentum, with trading volumes shrinking and the equal-weighted index lagging behind. The Nasdaq 100 is up 15% year-to-date, driven by AI infrastructure capex—expected to nearly double in 2024—but the broader market shows signs of exhaustion, with software stocks down nearly 12% and the equal-weighted Nasdaq 100 up just 2.2%. Crude oil prices remain elevated, fluctuating between 23% and 68% above pre-war levels, signaling sustained energy cost pressures. Meanwhile, economic policy uncertainty has surged to its highest in at least a decade, with shipping costs rising and business investment growing at a 10.4% annualized rate—far outpacing consumer spending. First-quarter GDP showed nonresidential investment contributing 1.39 percentage points to growth, while consumption, which makes up 68% of GDP, added just 1.08 points. However, the rally’s narrow base and thin liquidity raise concerns that further gains may depend on limited participation, particularly as AI-driven capex could face headwinds from geopolitical tensions. Gold and the US dollar have shown mixed movements, with Bitcoin remaining detached from broader macro trends. The market’s reliance on AI-related stocks and semiconductor optimism may not be sustainable if inflation fears persist, especially with CPI data due to test the resilience of the current rally.