Beware the Sucker’s Rally

The stock market is trading as if nothing has happened.

Stock indexes have seen large gains since the end of March. The S&P 500 is up 10% since then, while the Nasdaq is on a 10-day win streak… its longest in five years.

The rally completely erases the decline following the outbreak of war in the Middle East.

The big spark was the announcement of a two-week ceasefire between the U.S. and Iran in order to allow for negotiations.

While the rebound in equities seems like optimism, other key markets aren’t sending the same message. That includes the energy sector, where oil prices show that the war’s impact remains severe.

Here’s why you shouldn’t grow complacent with the stock market’s action – and how this sucker’s rally could come back to bite investors…

Oil Is Still High

Following the U.S. and Israel’s attack on Iran on February 28, oil prices soared higher. Brent crude oil, a global benchmark, jumped as much as 63%.

It’s easy to understand why. Approximately 20 million barrels of oil and oil products – 20% of global consumption – flowed through the Strait of Hormuz every day before the war.

The Strait sits off Iran’s southern coast, enabling Iran to close off access. The flow of oil has ground to a halt, with tanker traffic remaining limited. The situation is even more muddled by the U.S. beginning its own blockade of the Strait.

So while stock prices are rallying, energy markets aren’t confirming the move.

Brent crude is currently trading at $95 per barrel. Granted, that’s 15% off the high seen right at the start of the war. But it remains 30% higher compared to where prices were before the conflict began.

The normal flow of energy products has yet to resume, while the ceasefire between the U.S. and Iran is on fragile ground.

So while the stock market is acting like things are back to normal, we’re not seeing that reflected in energy prices.

As the war in the Middle East drags on, high energy prices aren’t going anywhere. But that means the stock market has a rude awakening ahead…

Big Risks in Stocks

The global energy markets pose a risk to stock prices in two ways.

First, soaring energy prices put a dent in economic activity. Consumer and business spending takes a hit as more income is diverted to gasoline purchases, and businesses face higher input costs from things like shipping and raw materials that use oil.

In fact, an estimate from Goldman Sachs forecasts that the rise in oil prices will completely wipe out the boost from President Trump’s One Big Beautiful Bill this year.

Consumer moods are also in the dumps, with the University of Michigan’s consumer sentiment measure hitting its lowest level ever in the 70+ years the survey has run.

Second, the inflationary impact of high energy prices is calling interest rates into question.

Despite the sharp rally in stock prices since the end of March, market odds still don’t show a Fed rate cut until September 2027.

That means stocks are rallying even as the growth outlook becomes murky and expectations for rate cuts have been pushed out.

So if you’ve been feeling FOMO (“fear of missing out”) when you watch the stock market rally, be careful. Until energy prices come down, I wouldn’t trust this rally.

If there’s any upset in the peace deal, news about rate hikes, or any number of other catalysts, stocks could return to earth with impressive speed.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict