Markets Advance as Investors Look Through Geopolitical Risk

July 13, 2026

Executive Summary

Markets finished the week higher despite renewed U.S.-Iran tensions, reflecting investors’ belief that the latest escalation is unlikely to lead to a prolonged disruption of global energy markets. Oil prices rose, Treasury yields moved modestly higher, and Technology and Energy stocks outperformed, but the overall market reaction remained measured. Beneath the surface, however, performance was narrow, with the Energy sector and a few AI-related semiconductor stocks leading while the equal-weighted S&P 500 and small-cap stocks declined.

The economic backdrop remains resilient but complicated. Services activity continues to expand, layoffs remain subdued, and consumer financial expectations have improved. At the same time, inflation expectations have firmed, input-cost pressures remain elevated, and higher energy prices could complicate the Federal Reserve’s policy outlook. With June CPI, Chair Warsh’s testimony, and the start of second-quarter earnings season all arriving this week, investors will be focused on whether inflation and corporate profits can continue to support elevated valuations.

Key Takeaways:

• Equity markets advanced despite renewed U.S.-Iran tensions, suggesting investors remain skeptical that the conflict will become a sustained shock to growth or energy markets.
• Market leadership narrowed, with Technology, Energy, AI chip, and memory stocks outperforming while the equal-weighted S&P 500 and small-cap stocks declined.
• Brent crude rose approximately 5% to around $75 per barrel, but remains well below prior peaks near $120, helping limit the broader market impact of geopolitical risk.
• Services activity remains in expansion, and jobless claims remain subdued, reinforcing the view that the economy is not signaling recession.
• Inflation pressures remain a key concern, with elevated services input costs, higher consumer inflation expectations, and rising energy prices leaving the Federal Reserve with little urgency to ease policy.
• Second-quarter earnings season begins this week, with large banks reporting first; S&P 500 earnings growth is expected to be strong but heavily concentrated in AI-related companies.
• Key catalysts include Tuesday’s CPI report, Chair Warsh’s testimony, the start of earnings season, and further developments in U.S.-Iran hostilities.

Financial Markets

Equity markets finished the week higher, showing notable resilience despite a renewed escalation in tensions between the United States and Iran. Technology and Energy led the advance, while performance beneath the surface was more uneven. The equal-weighted S&P 500 and small-cap stocks declined, suggesting that investor appetite remained concentrated in a narrower group of large-cap leaders rather than broad-based across the market.

Geopolitical developments remained the dominant macro headline. Retaliatory attacks between the United States and Iran continued, with both sides making competing claims regarding control and access through the Strait of Hormuz. While the risk of further escalation has increased, both countries have previouly signaled a preference for a diplomatic solution. Brent crude oil rose approximately 5% in response to the renewed hostilities, ending the week near $75 per barrel, and it is continuing to rise in early trading today.

Market behavior suggests investors remain skeptical that the latest escalation will become both meaningful and sustained. Equities advanced, Treasury yields moved only modestly higher, and oil prices, while up on the week, remain well below prior peaks near $120 per barrel. This measured response indicates that investors are pricing in higher geopolitical risk but not yet a full-scale energy shock.

Treasury yields increased during the week as investors considered the inflationary implications of higher energy prices. The June Consumer Price Index report, scheduled for release on Tuesday, will be an important test of whether inflation pressures are continuing to moderate or beginning to reaccelerate. Uncertainty surrounding the Federal Reserve’s next policy move may add to market volatility, particularly if the inflation data surprise to the upside.

Second-quarter earnings season begins this week, and the early reporting calendar is heavily weighted toward large financial institutions. JPMorgan, Bank of America, Goldman Sachs, Citi, and Wells Fargo are scheduled to report on July 14th, followed by Morgan Stanley, BlackRock, and Johnson & Johnson on July 15th, and Netflix, UnitedHealth, and GE Aerospace on July 16th. Earnings previews have been broadly upbeat, with investors focused on potential tailwinds from investment banking and trading activity. Commentary on consumer spending will also be closely watched for cues about household health and the durability of demand.

Consensus expectations call for S&P 500 earnings growth of approximately 23% in the second quarter, once again dominated by AI-related companies. In the near term, earnings growth is likely to be the most important driver of equity performance. Valuations remain elevated in several leadership areas, making continued profit growth and constructive forward guidance essential for sustaining the rally.

Economics

The latest economic data continue to point to an expanding economy, though persistent inflationary pressures remain beneath the surface. Services activity remained in growth territory in June. The ISM Services PMI eased 0.5 point to 54.0, still comfortably above the 50 level that separates expansion from contraction. Business activity registered 55.4, new orders remained healthy at 55.1, and the employment component rebounded from contraction to 51.2. However, the prices paid index remained elevated at 67.7, underscoring continued input-cost pressure across fuel, transportation, labor, software, and memory components.

Consumer data offered a similarly nuanced picture. The New York Fed’s June Survey of Consumer Expectations showed that median one-year-ahead inflation expectations rose to 3.7%, the highest reading since September 2023, while three-year expectations increased to 3.3%. Five-year expectations were unchanged, and median inflation uncertainty declined across all time horizons. In other words, households expect somewhat higher inflation over the near term, but longer-term expectations remain more stable.

Labor-market perceptions improved in the survey. Respondents saw a lower probability that the unemployment rate would rise over the next 12 months, though that measure remains above recent averages. The perceived probability of losing one’s job over the next year declined to 14.1% from 15.1%, falling below its trailing 12-month average. At the same time, the expected probability of finding a new job if one’s current job is lost rose to 44.9%, with the improvement driven largely by respondents earning less than $50,000.

Policy

The June FOMC minutes did little to alter the market’s understanding of Federal Reserve policy. The Fed left interest rates unchanged at the June meeting, as expected, but the updated Summary of Economic Projections showed nine officials projecting rate hikes this year, reinforcing a hawkish interpretation. The minutes also confirmed that divisions within the Committee remain meaningful.

Most participants still believe inflation can cool over time, allowing the Fed to remain on hold or eventually move toward lower rates. However, policymakers also emphasized that persistent inflation driven by AI-related demand, the Middle East conflict, or tariffs could warrant additional rate hikes. A few members saw a case for raising rates at the June meeting but ultimately supported no change. Views on the policy path remain divided, with many officials expecting rates to end 2026 at or below current levels, while others project rates above current levels.

Inflation remains the central policy challenge. The Fed staff’s inflation forecasts for 2026 and 2027 were higher than in the April forecast, reflecting the impact of the Middle East conflict and the inflationary effects of AI-related investment demand. Participants generally continued to view upside risks to price stability as elevated.

The labor-market assessment was more balanced. Participants generally viewed employment conditions as stable, with unemployment expected to remain contained. Many officials noted that the labor market is no longer a meaningful source of inflationary pressure, and most expect conditions to remain stable in the near term. This gives the Fed some flexibility, but it does not yet create a clear case for easing.

Growth expectations also remained constructive. Participants generally expect solid GDP growth through year-end, supported by AI investment, consumer spending, and fiscal policy. Fed staff modestly lowered its growth outlook from April, but the broader message remains that the economy continues to expand rather than weaken sharply.

Against this backdrop, policy uncertainty remains an important market driver. Investors will focus on Chair Warsh’s testimony this week for additional guidance on the Fed’s reaction function, especially given the crosscurrents from resilient growth, sticky inflation, higher energy prices, and internal division within the Committee. The Fed remains data-dependent, but the balance of risks has shifted toward patience and caution rather than preemptive easing.

Conclusion

Markets showed resilience last week, advancing despite renewed U.S.-Iran tensions and higher oil prices. The market response suggests investors are taking geopolitical risks seriously but are not yet pricing in a sustained disruption to global energy markets. Oil remains well below prior peaks, equities moved higher, and yields rose only modestly.

The economic backdrop remains constructive but complicated. Services activity continues to expand, households report improving financial conditions, and jobless claims remain subdued. At the same time, inflation expectations have firmed, input-cost pressures remain elevated, and higher energy prices could complicate the path back toward price stability.

The Federal Reserve’s June minutes reinforced this tension. Policymakers remain divided, with most still expecting inflation to cool but many acknowledging that persistent price pressures could require additional tightening. This leaves markets highly sensitive to incoming data, especially Tuesday’s CPI report.

The week ahead brings several important catalysts: June CPI on Tuesday, Chair Warsh’s testimony, the start of second-quarter earnings season, and the ongoing evolution of hostilities between Iran and the United States. Earnings may prove especially important. With S&P 500 profit growth expected to be strong but heavily concentrated in AI-related companies, investors will be looking for confirmation that fundamentals can support elevated valuations.

For long-term investors, the message remains one of balance. The expansion remains intact, corporate earnings expectations are constructive, and AI-related investment continues to provide a meaningful growth tailwind. However, policy uncertainty remains elevated, and geopolitical risks could quickly reintroduce volatility. A disciplined, diversified approach remains appropriate as markets navigate a still-resilient but increasingly sensitive environment.

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