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As of the closing bell on March 26, the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite were in correction territory, with the broad-based S&P 500 one bad day away from joining them. By the closing bell on April 15, the Nasdaq Composite and S&P 500 had reached new all-time highs, while the Dow remained about 3% away from its record close.
Speculation that the Iran war will end relatively quickly and that artificial intelligence (AI) will continue to drive outsized earnings growth has pushed the Nasdaq Composite higher for 11 consecutive trading sessions—its longest winning streak since November 2021. However, the rally over the last three weeks is not assured to last, as two major risks for the stock market are worsening.
Investors have increasingly expected the Iran conflict to end soon. Even so, the inflationary effects of President Donald Trump’s actions are expected to ripple through the U.S. economy for several quarters.
Shortly after military operations began on Feb. 28, Iran closed the Strait of Hormuz to virtually all oil exports. The closure had extended to seven weeks as of April 15, representing the largest energy supply disruption in modern history. Crude oil prices have risen sharply, contributing to higher consumer costs and increasing transportation and production expenses for American businesses.
Trailing 12-month (TTM) inflation for March jumped 90 basis points to 3.3% from 2.4% in February. The Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool estimates TTM inflation for April at 3.58%, a projection that has been rising for weeks.
At the start of the year, Wall Street expected the Federal Reserve to cut interest rates multiple times. Lower borrowing costs can support hiring, acquisitions, and innovation, and lower lending rates are also needed to sustain aggressive AI data center build-outs. But with TTM inflation near 3.6%, the Federal Open Market Committee (FOMC) has little incentive to cut rates. The odds have shifted away from FOMC rate cuts in 2026, with expectations moving toward possible rate increases before the year ends.
Even though investors have eliminated the Nasdaq Composite’s correction and the S&P 500’s pullback in less than three weeks, energy price shocks and inflationary pressure are not expected to disappear immediately.
Another risk factor for Wall Street is equity valuations.
The article notes that value is subjective and varies by investor. However, it points to the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E (CAPE) Ratio, as a measure designed to reduce subjectivity by using average inflation-adjusted earnings over the last 10 years. Unlike the traditional P/E ratio based on trailing 12-month earnings, the CAPE Ratio is intended to remain useful across different economic conditions.
Back-tested over the last 155 years, the S&P 500’s Shiller P/E has averaged 17.35. As of April 15, it stood at 40.57, the second-priciest valuation during a continuous bull market since January 1871. The only period more expensive than today was the run-up to the dot-com bubble.
According to the article, there have been only three instances—now included—where the CAPE Ratio has topped 40. The prior two occurrences, in the lead-up to the dot-com bubble and the week before the 2022 bear market began, were followed by the S&P 500 losing 49% and 25% of its value, respectively.
While the long-term record shows that the Dow, S&P 500, and Nasdaq Composite can rise over multidecade periods, the near-term outlook is described as worsening despite the strength in major indexes over the past few weeks.
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