Markets Peel Back On Middle East Conflict

Scott Poore, AIF^®, AWMA^®, APMA^®

July 20, 2026

Markets struggled last week in the face of increased military action in the Middle East and stretched momentum stock valuations. Energy-related stocks and oil prices increased, perhaps pouring cold water on declining inflation. For the time-being, however, inflation decreased substantially last month. June's CPI report came in much lower than expected at -0.4%, bringing the year-over-year number down to 3.5% (equal to the historical average).^{1 2} It is the largest one-month drop in inflation since COVID. The primary agent of higher inflation - gasoline - declined more than 9% in June relative to rising 7% in May. The Cleveland Federal Reserve is expecting a flat-to-slightly lower CPI reading for July, which if true, would bring the year-over-year number to 3.3%, below the historical average.³ Equities are continuing to get pushed around by the war headlines. However, the clock is ticking on how long the conflict can last. Iran has essentially lost its navy during this conflict and their air force is weak and outdated.⁴ Iran still has a considerable missile and drone arsenal.⁵ From an economic standpoint, time is running out as the U.S. employs another export blockade on Iran. Iran is losing approximately $200-250 million per day as their major resource -oil - cannot be exported.⁶ The IMF estimates that this could cause Iranian GDP to drop from an already concerning -0.7% to as low as -5.4% to -6.1%.⁷ What's worse for Iran, since the conflict began, new pipelines are proposed or are being constructed to essentially make the Strait of Hormuz irrelevant from a global oil flow perspective. It's very early in the the 2nd quarter corporate earnings season and only 10% of S&P 500 companies have reported thus far. Yet, to-date 88% of companies are beating earnings estimates, which is above the 5-year average of 78%.⁸ However, momentum and "growth" stocks are struggling against elevated valuations. AI-related names are struggling as new chips and software are doubling output and efficiency. On the positive side, this is causing once-forgotten sectors to emerge as leaders among S&P 500 industries. Sectors such as Healthcare, Financials, Real Estate, and Consumer Staples are positive over the last 30 days while Technology is down considerably.⁹ If technology stocks can find some kind of floor soon, and other sectors continue to move higher, a more broad-participating market would be a good thing for the current bull market cycle.

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