By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel agrees that the Strait of Hormuz conflict is the critical binary event, with a potential energy-driven inflation spike posing the single biggest risk. They disagree on the Fed's response, with some expecting liquidity tightening and others a pause or cut, leading to a mixed consensus on the market's ability to absorb rate pressure and support multiples.
Risk: A sustained oil price spike and energy-driven inflation, potentially triggering a liquidity-driven equity sell-off and multiple compression.
Opportunity: AI-driven productivity gains and earnings acceleration, which could absorb modest rate pressure and support multiples if energy inflation proves transitory.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
The U.S. stock market fell sharply in March after President Donald Trump authorized military strikes in Iran, but the major indexes recovered very quickly. Since April, the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq Composite (NASDAQINDEX: ^IXIC) have delivered astonishing gains of 12% and 18%, respectively.
The market has shrugged off geopolitical tensions and elevated oil prices because many companies reported first-quarter financial results that beat Wall Street's expectations. In particular, several technology companies tied to the artificial intelligence (AI) boom posted exceptional numbers.
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However, the stock market may be more fragile than it appears. Jerome Powell issued two critical warnings during his final months as Federal Reserve chairman, and investors who ignore the warnings may pay a high price for their complacency. Here's what you need to know.
In January, the market expected the Federal Open Market Committee (FOMC) -- the branch of the Federal Reserve that sets monetary policy -- to cut its benchmark interest rate by at least a half percentage point this year. At the time, lower rates seemed like a sure thing because the jobs market was struggling and inflation was cooling.
But the economic environment looked much different by April. Job growth had bounced back, and inflation had reaccelerated due to rising oil prices tied to the Iran conflict. So, the FOMC held rates steady for the third straight meeting, and Jerome Powell gave this warning during his final press conference as Fed chair:
The economic outlook remains highly uncertain and the conflict in the Middle East has added to this uncertainty. ... In the near term, higher energy prices will push up overall inflation. Beyond that, the scope and duration of potential effects on the economy remain unclear.
One source of uncertainty is the extent to which the oil shock will bleed into core inflation (which excludes volatile food and energy). The oil shock directly impacts headline inflation by raising gas and utility prices, but it also impacts core inflation indirectly by raising transportation and manufacturing costs.
The next few weeks are critical. Michael Cembalest at JPMorgan Chase writes, "If the Strait of Hormuz is not reopened sometime in June/July, global oil inventories will hit an operational floor and result in greater rationing." That would push energy prices higher and raise the odds that the oil shock bleeds heavily into core inflation.
So what? The Fed may overlook transitory increases in headline inflation, but a sustained increase in core inflation would likely warrant higher interest rates, and history says that would be bad news for stocks. Since 1999, the Fed has started four rate-hike cycles, and the S&P 500 and Nasdaq Composite have always declined over the following three months.
The FOMC does not make monetary policy decisions with specific asset prices in mind, nor do Fed officials claim to know what the correct price for any specific asset might be. But last September, Jerome Powell warned, "Equity prices are fairly highly valued."
At the time, the S&P 500 traded at 22.5 times forward earnings. The index is slightly cheaper today with a forward price-to-earnings multiple of 20.1, but that is still a premium to the 10-year average of 19. And the current valuation is particularly concerning when considered alongside the possibility of higher interest rates.
Higher interest rates mean businesses and consumers pay more to borrow money, which reduces spending and corporate profits. Higher interest rates also compress stock market valuations by making bonds look more attractive. When investors can get decent returns from less risky alternatives, they are less likely to pay large premiums for stocks.
Here's the big picture: The stock market is more fragile than it appears because inflation may force the Fed to raise interest rates at a time when valuations are already elevated. That could easily lead to a correction or even a bear market. Investors should keep that in mind when they make decisions. Now is not the time to take big risks.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"The S&P 500's vulnerability hinges on whether the oil shock bleeds into core inflation by July, not on valuations alone."
The article rightly flags Powell's inflation uncertainty warning and S&P 500's 20.1x forward P/E premium to the 19x 10-year average as real risks, especially if oil-driven core CPI forces the Fed into hikes. Yet it glosses over the asymmetric AI earnings acceleration now embedded in 2025-26 consensus estimates, which could absorb modest rate pressure without the historical post-hike drawdowns. The June/July Strait of Hormuz test is the true binary: contained energy pass-through keeps policy on hold and supports multiples; a sustained spike overrides AI tailwinds.
Even rapid AI-driven EPS growth cannot prevent multiple compression if core inflation reaccelerates above 3% and forces the Fed to hike, as valuation sensitivity to rates has historically dominated growth surprises in the first 90 days of tightening.
"Earnings growth and policy flexibility can keep stocks supported even if rates rise and valuations look stretched."
Article paints a near-term risk for equities: if core inflation sticks and oil shocks persist, the Fed could hike again, and a 20x forward earnings multiple looks rich vs a low-rate backdrop. It leans on Powell-era warnings and a historical pattern that rate hikes tend to precede pullbacks. However, the data window is narrow, and markets often price in a path for policy before true earnings outcomes. AI-driven productivity could boost earnings decoupling from rates, and cooling energy inflation could cap the impact of oil shocks. A smoother macro path would deprive the squeeze implied by the article.
One could argue the opposite: the Fed has shown willingness to pause or pivot if growth slows, so a rate-hike scare may not materialize. And AI-driven earnings growth could keep multiples supported even with higher rates.
"The article's premise is undermined by significant factual inaccuracies regarding the current Fed Chair's tenure and an oversimplification of valuation metrics that ignore current corporate margin expansion."
The article's reliance on 'Jerome Powell's final months' is a massive red flag—Powell is currently the Chair, and the piece cites a timeline that feels like a hallucinated or outdated historical context. Beyond this factual error, the argument that a 20.1x forward P/E is 'expensive' ignores the massive margin expansion driven by AI-led operational efficiency in the S&P 500. While the risk of core inflation stickiness is real, the market is currently pricing in a 'soft landing' where productivity gains offset higher cost-of-capital. A correction is possible if the Strait of Hormuz conflict triggers a supply-side shock, but the current earnings trajectory remains robust enough to support these multiples.
If core inflation remains sticky due to energy shocks, the Fed may be forced to keep rates 'higher for longer,' which would inevitably compress P/E multiples toward their historical 16-17x mean regardless of AI productivity gains.
"The article's bear case hinges entirely on core inflation bleeding from energy shocks—a plausible but unquantified scenario that the market may have already priced into its modest 5.8% valuation premium."
This article conflates two separate risks—inflation-driven rate hikes and valuation compression—but conflates them without quantifying the actual trigger. The S&P 500 at 20.1x forward P/E is only 5.8% above the 10-year average of 19x; that's not a red flag, that's noise. The real question: does core inflation actually *accelerate* from here, or does the oil shock prove transitory? The article cites JPMorgan's June/July Strait of Hormuz thesis as critical, but offers no base-case probability. Meanwhile, it ignores that the market has already repriced in rate-hold expectations—the 12-18% rally since April reflects earnings beats, not complacency. The 'four rate hikes since 1999 all preceded declines' claim is cherry-picked; it omits the magnitude and duration of those declines, and ignores that three of those cycles occurred in very different macro regimes.
If core inflation remains anchored below 3% and the oil shock dissipates by Q3, the Fed stays on hold indefinitely, and a 20x multiple on accelerating AI-driven earnings growth becomes cheap, not expensive—especially relative to 10-year Treasuries yielding 4%.
"Earnings beats already in forward estimates leave the 20.1x multiple exposed to any policy surprise from energy shocks."
Claude notes the 12-18% rally reflects earnings beats, but this ignores those beats are already embedded in 2025-26 consensus, leaving scant buffer if the Hormuz shock triggers even one extra hike. Gemini correctly flags the Powell timeline error, yet the larger gap is no base-case probability on conflict escalation—without it, the soft-landing multiple support remains an untested assumption rather than evidence-based. Valuation sensitivity still dominates short-term.
"AI-driven earnings upside isn’t guaranteed to shield multiples from rate risk; if AI capex or margins disappoint, valuation compression remains a real risk."
One flaw in Grok's logic: treating AI-driven EPS as a one-way absorber of rate pressure. In reality, AI gains rely on ongoing capex, deployment across operating models, and effective pricing power. If AI investment lags, or competition squeezes margins, the assumed uplift won't materialize and multiples could reprice lower even with a contained Hormuz scenario. This keeps risk of a sharper multiple compression intact should rates surprise to the upside.
"An energy-driven inflation shock forces a liquidity squeeze that simultaneously compresses multiples and chokes off the capital-intensive AI growth narrative."
ChatGPT is right to question the 'AI-absorber' thesis, but misses the secondary risk: liquidity. If the Strait of Hormuz triggers an energy-driven inflation spike, the Fed won't just hold; they will drain liquidity via QT to combat the supply-side shock. This creates a double-whammy—multiple compression from higher discount rates and a liquidity-driven equity sell-off. AI capex is highly sensitive to the cost of capital, so a liquidity crunch would kill the very EPS growth we are banking on.
"Supply-side inflation typically triggers Fed *pause*, not tightening—Gemini conflates demand-side and supply-side policy responses."
Gemini's liquidity-drain thesis is underexplored but assumes the Fed *must* tighten via QT if energy shocks hit. Historically, supply shocks have triggered *pause* or *cut* cycles, not acceleration—see 2008, 2011. The Fed distinguishes demand-side inflation (hike) from supply-side (hold or ease). If Hormuz spikes oil but growth softens, QT reversal becomes more likely than continuation. That flips Gemini's double-whammy into a single tailwind.
The panel agrees that the Strait of Hormuz conflict is the critical binary event, with a potential energy-driven inflation spike posing the single biggest risk. They disagree on the Fed's response, with some expecting liquidity tightening and others a pause or cut, leading to a mixed consensus on the market's ability to absorb rate pressure and support multiples.
AI-driven productivity gains and earnings acceleration, which could absorb modest rate pressure and support multiples if energy inflation proves transitory.
A sustained oil price spike and energy-driven inflation, potentially triggering a liquidity-driven equity sell-off and multiple compression.