When everyone on a trading floor has decided that the bad news is behind them, you can hear a certain level of confidence. On May 6, you could hear it when the Dow added more than 600 points in a single session and the S&P 500 surged 1.46% to 7,365.12 on a report that the US and Iran were nearing an agreement. That afternoon, traders at the New York Stock Exchange appeared less like those in charge of a war premium and more like those who had already amassed one. In a statement that has become something of a motto, Ed Yardeni encapsulated the sentiment months earlier: “As far as the stock market is concerned, the war is over until further notice.”
That memo doesn’t seem to have reached the Pentagon. Six days after that record close, a man by the name of Jules Hurst, who was serving as comptroller—a title that in and of itself conveys how precarious things are at the moment—sat in a House hearing room and informed lawmakers that the war had already cost $29 billion. The amount was $25 billion two weeks prior. $12 billion in the first six days prior to that, according to another official. Before this is completed, a figure exceeding a trillion has been proposed by an outside budget expert. The arithmetic is not going down; it is only going in one direction.
The peculiarity of this split is worth pondering. Investors have effectively priced in an unwritten conclusion by placing bets on what economists have come to refer to as the “TACO trade”—the somewhat irrational notion that Trump always retreats once the economic pain becomes severe enough. It makes sense. He has previously de-escalated. Markets don’t forget. However, the president stated outside the White House that he doesn’t consider Americans’ financial circumstances and that the stock market rising or falling “a little bit” wasn’t by any means the most important thing to him during the week Wall Street was celebrating. That’s not the voice of a man who is about to give up.
In the meantime, the story is constantly interrupted by the actual conflict. The Strait of Hormuz, which formerly transported about 25% of the world’s gas and oil, is still mostly blocked. Drones that hunt mines are coming from Britain. Without a complete peace agreement, some NATO allies are refusing to send ships. Hegseth informed Congress that the United States has “a plan to escalate if necessary” in response to unusual opposition from his own party. This is hardly the language of an impending ceremony with handshakes and flags.
Therefore, peace isn’t actually what’s holding up the market. AI is involved. Nearly half of the S&P 500’s value now comes from tech and AI companies, which, according to one economist, operate on their own dynamic and are unaffected by nearly anything, including the Gulf War. The rally appears much more mundane when the Magnificent Seven are removed. The index is pricing semiconductors and dismissing everything else, rather than pricing peace.
That’s the gap, and these kinds of gaps tend to close suddenly rather than gradually. Trump described the most recent state of the ceasefire as “the weakest right now,” claiming he hadn’t even finished reading Iran’s proposal. The IMF has already reduced global growth and raised inflation projections. The average price of gas is now predicted to be $3.88 per gallon. So far, none of that has broken the optimism.
As you watch this play out, it’s difficult to avoid thinking that someone will be mistaken, and in a costly way. Either the market is holding a position it borrowed from a script Tehran never signed, or the Pentagon’s tab stops rising and the traders appear prophetic. Here, history provides icy solace: stocks have increased during many protracted conflicts. The ones that didn’t finish on time have also caught them off guard.
