Yardeni Raises Odds of US Market Meltdown to 35% on Iran War
Yardeni has raised the probability of a market meltdown to 35% for the rest of the year, up from 20% previously. At the same time, he slashed the odds of a meltup — a rally driven more by investor enthusiasm than underlying fundamentals — to just 5% from 20%. (…)
“The US economy and stock market are stuck between Iran and a hard place currently. So is the Fed,” Yardeni wrote in a note. “If the oil shock persists, the Fed’s dual mandate would be stuck between the increasing risk of higher inflation and rising unemployment.” (…)
His base case remains intact. The so-called “Roaring 2020s” scenario, which envisages a decade of robust and sustainable US growth fueled by rapid productivity gains, still carries a 60% probability through the end of the year.
The outlook is better over the coming decade. Yardeni assigns an 85% chance of a continuation of the Roaring 2020s. He also sees a 15% chance of a “stagflating 1970s redux.”
“If investors start expecting stagflation, a bear market is more likely,” he wrote.
The WSJ account omitted these other comments:
According to Polymarket.com, the odds of a recession this year jumped to a three-month high of 34% on Friday from 21% on Wednesday, February 25, just before the war started. We started to see trouble ahead last week on Tuesday, when we predicted a 10%-15% correction in the S&P 500 because of the war. Now we can’t rule out a bear market and even a recession. It all depends on how long the Strait will be closed, obviously. (…)
We are also tracking Polymarket.com for the odds that the House of Representatives will flip from a Republican to a Democratic majority. It wasn’t looking good for the Republicans even before the war.
It also isn’t looking good for the stock and bond markets. Both the S&P 500 and Nasdaq are likely to fall below their 200-day moving averages on Monday
The 10-year US Treasury bond yield has been remarkably subdued, between 4.00% and 4.25%, over the past year. Soaring oil prices are likely to disturb that calm, sending the yield higher. Commodity price indexes excluding crude oil and petroleum products are likely to tumble on recession fears. Even the price of gold has stumbled because the oil shock has boosted the dollar’s foreign exchange value. (…)
BTW: Prediction markets, the flavor of the moment, see the chances of a swift conclusion as having ebbed swiftly over the last week, and now put a 48% probability on the notion that there still won’t be a ceasefire by the end of next month.
Iran has identified Trump’s Achille’s heel: affordability and the stock market.
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US average gasoline prices have already shot up 16% to $3.44.
- Worse still, crop prices are on the rise with further room to surge should the war persist. The Iran situation is stalling access to the country’s low-cost urea and ammonia facilities, vital for agricultural fertilizers, which account for about 5% and 11% of global trade in fertilizers, respectively. This assumes much of their infrastructure survives the bombardment. So far, urea prices have shot up by about 25% since the outbreak of war (…). Roughly 45% of global urea trade is sourced from producers with manufacturing sites in the Persian Gulf and shipped to major import regions, including India, Europe and Brazil, via the Strait of Hormuz. The commodity is benefiting from an additional lift from rising prices of natural gas, a crucial element in fertilizer production. (John Authers)
- Food prices, in particular, became a big issue in the last presidential election, and have appeared to be coming under control. A reversal would be unwelcome.
- Prices for chemical fibers such as polyester and acrylic — oil byproducts used in garment manufacturing — have risen more than 10% since the US and Israel started strikes on Iran over a week ago, according to seven apparel manufacturers in southern and eastern China interviewed by Bloomberg News. Fiber suppliers are now adjusting prices once or even twice a day to keep pace with volatile crude markets, the manufacturers said. (Bloomberg)
- Suddenly, US oil imports from Canada (4.4Mb/d) are welcome… While the US produces a record amount of its own light oil, its refining complex (especially on the Gulf Coast and in the Midwest) is heavily geared toward the heavy crude specifically supplied by Canada.
- G7 to discuss joint release of emergency oil reserves
February Employment: What the Jobs Report Giveth, It Taketh Away
Solid job growth in January gave way to a 92K decline in nonfarm payrolls in February. Private payrolls fell by a similar 86K, the largest decline in private employment since December 2020. Some of this weakness can be attributed to one-off factors, such as poor weather and strikes. But even excluding these factors, February employment growth along with downward revisions to the prior two months leaves job growth weak. (…)
Today’s data will challenge what was a growing view among Fed officials that the labor market is stabilizing, and the Iran conflict further compounds the outlook. Ultimately, the Federal Reserve cannot do much to combat higher inflation from a supply-side oil price shock. Yet, the inflationary impact of the conflict in Iran makes it harder to be a dove at the moment. (…)
The contraction came on the heels of downward revisions to January (-4K) and December (-65K), leaving the three-month average pace of job growth at a meager 6K last month compared to 73K headed into this report.
There were some idiosyncratic factors at play. Approximately 31K nurses and other healthcare professionals were on strike in February, underpinning the 19K job decline in the healthcare & social assistance industry which has been the stalwart of overall job growth. With the strike already ended, these workers will be back on the payroll in March, leading to a commensurate lift to healthcare hiring in next month’s report. Elsewhere, back-to-back harsh winter storms restrained hiring in weather-sensitive industries, such as construction and leisure & hospitality, where payrolls slipped. Federal government payrolls also continue to decline, albeit the pace of contraction is slowing. (…)
With a lower run-rate for job growth, it is becoming less unusual for payrolls to veer into negative territory at times, particularly when there are temporary factors that reduce hiring.
ING:
(…) Essentially, the jobs market is just treading water with payrolls trending at around 50k per month. The job concentration risk point still holds though. Three sectors (government, leisure & hospitality and private education & healthcare services) are still responsible for all job creation over the past three years. All other sectors combined (essentially the bulk of the US economy) have lost 460k jobs since December 2022.
Cumulative job increases since December 2022
We know that there are more unemployed Americans than there are job vacancies and this is now depressing wage growth. Average earnings did rise 3.8% year-on-year in today’s report, but that is likely due to lower wage workers not being able to get to work and not being reported and skewing the reported earnings in favour of higher-earning office workers who could work from home.
The broader measure of wage growth within the employment cost index risks dropping below 3% YoY and we already know that real household disposable incomes are flat lining. The surge in energy costs, particularly for gasoline, that we expect over the next few weeks in response to global market moves, means that we could see real disposable incomes turning negative. That risks creating an intensifying headwind for growth in the second half of the year.
While higher energy costs are inflationary and make near-term rate cuts look less probable, it also puts more pressure on consumer finances and can ultimately be demand destructive. This can push core inflation pressures lower over the medium to longer term. Therefore, we argue the story is one where rate cuts are delayed rather than removed from forecasts. We have pushed our Fed rate cut forecasts from June and September to September and December.
This chart supports ING’s view on wages. The ECI-wages is a more accurate measure of wage trends. It was +3.4% YoY in Q4’25 and on a downtrend.
Aggregate payrolls (employment x hours x wages) from the BLS data are up 4.4% YoY in February, roughly in line with the past year, but it all comes from wages per BLS inflated numbers.
Normalizing job growth to 50k per month and reducing wage growth to 3.0%, aggregate payrolls would be rising 3.5% YoY, well below 1.0% in real terms, vs +1.5% in 2025.
I had warned on February 16 that January’s +130k job growth was artificially high (birth-death model, seasonal adjustments). It was only revised down 4k but note that December was initially revised down 2k before Friday’s –65k cut.
At best, the US labor market is at stall speed. The unemployment rate rose from 4.3% to 4.44% but, absent the decline in the participation rate, unemployment would be closer to 5%.
As KKR notes, “despite reshoring and Fed cuts, the Goods sector remains in a recession. All told, Goods jobs were -25,000. Every sector was negative: Mining/Logging, Construction, Durable Goods, and Non-Durable Goods”
Trump’s Achille’s heel is also the economy’s. With only wages fueling income growth, slowing to around 3.0-3.5%, and inflation potentially pushing above 3.0%, growth in real spending power is close to zero.
Add a weak stock market and the top tier will suddenly merge with the majority of Americans already hurting.
Retail Sales Start Year on Decent Note, February Looks Weaker
(…) While overall retail sales slid 0.2% during the month, when you strip out some of the more volatile components the control group measure of sales rose 0.4% with some modest upward revisions to the prior months of data. This suggests goods consumption started the year on a good note given this component tracks more closely with overall goods spending, as the excluded components (autos, gas, building materials & restaurants) are included elsewhere within GDP or through other source data.
One big note of caution though is that these data are even more backward looking than usual as the government continues to catch up on data releases following the historic shutdown last Fall. Retail spending in February looks a bit weaker. High-frequency data on credit card spending from Bloomberg show a weaker average year-ago pace of spending registered in February as historic winter weather across the Northeast and other parts of the country likely dented consumption.
As far as January is concerned, most of the weakness in headline sales can be traced to sales at auto dealers and gasoline stations. Vehicle unit sales slipped to their lowest pace since late 2022 in January. Meanwhile the drop in gasoline sales reflects a decline in retail gasoline prices specifically with the average daily price at the pump down about six-cents/gallon from December.
Source: U.S. Department of Commerce and Wells Fargo Economics
This weakness was somewhat offset by a pop in sales at building material stores, which was also likely at least partially price related, as the consumer price index for tools, hardware & outdoor equipment has been strong in recent months. Restaurant sales slipped 0.2% in January, which isn’t an encouraging sign for broader services spending, but isn’t overly worrying either, as high-frequency credit card data suggest some stabilization in restaurant spend after a drop-off toward year-end.
That said, we’re not looking for much improvement in broad retail come February. Incoming data suggest some softness in activity, including: poor weather, subdued credit card spending, and weak orders activity reported by retail purchasing managers. Leisure & hospitality employment also slipped materially during the month, though there was some stabilization in travel-related measures of data like hotel occupancy and TSA throughput.
With tax refunds running ahead of last year’s averages, we should start to see more cash flow materially support spending come March. One big caveat here is how the conflict in Iran evolves and its impact on domestic retail gasoline prices.
Consumers are fairly sensitive to gas prices and the average price of a gallon of gasoline is already up by twenty-five cents in the first week of March compared to the average registered in February on the national level. Higher prices will boost these nominal retail figures, but would translate to lower real, or inflation-adjusted consumption. More cash flow stemming from higher average refunds is a factor we expect to offset spending weakness this year, but higher prices at the pump may dent confidence or sap up some of those funds.
Source: U.S. Department of Commerce and Wells Fargo Economics
A less positive spin would point out that total retail sales were flat in both December and January and only up 0.2% for Control Sales. Goods inflation was up 0.1% leaving real sales roughly unchanged in December/January.
EARNINGS WATCH
From LSEG IBES:
491 companies in the S&P 500 Index have reported earnings for Q4 2025. Of these companies, 72.7% reported earnings above analyst expectations and 22.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 4.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.6%.
Of these companies, 72.6% reported revenue above analyst expectations and 27.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 29% missed estimates.
In aggregate, companies are reporting revenues that are 2.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.7%.
The estimated earnings growth rate for the S&P 500 for 25Q4 is 14.1%. If the energy sector is excluded, the growth rate improves to 14.6%.
The estimated revenue growth rate for the S&P 500 for 25Q4 is 9.2%. If the energy sector is excluded, the growth rate improves to 10%.
The estimated earnings growth rate for the S&P 500 for 26Q1 is 12.8%. If the energy sector is excluded, the growth rate improves to 13.8%.
Trailing EPS are now $275.67. Full year 2026e: $316.69. Forward EPS: $315.89e. Full year 2027e: $367.81.
Amazingly, S&P 500 revenues rose 9.2% in Q4’25, beating an already strong forecast of 7.3%. All sectors beat!
Earnings estimates keep rising:
Encouraged by corporates:
Although things may be changing as we speak…
Based on today’s pre-opening of 6650, the forward P/E is 21.0.
The 200-d moving average is at 6582.
Oil, AI, and S&P 500 earnings
From Goldman Sachs:
Following the launch of military operations in the Middle East over the weekend, the S&P 500 has sold off by 2%. The historical impact of geopolitical risk shocks on equity prices has typically been short lived. During seven spikes in the Geopolitical Risk Index since 1950, the S&P 500 fell by an average of 4% during the first week. On average equities rebounded to their levels prior to these shocks within the subsequent month, but the range of historical outcomes has been wide.
The direct impact of modestly higher oil prices on GDP growth and inflation should be limited. Brent crude oil jumped by 27% this week to $93 per barrel. Our economists’ rule of thumb is that a sustained $10/barrel increase in oil would reduce 2026 GDP growth by about 10 bp and boost core CPI by less than 5 bp.
Likewise, the net effect of higher oil prices on S&P 500 EPS should be roughly neutral, but with variation across industries. Higher oil prices directly benefit the earnings of Energy firms, but are a headwind for industries that rely on oil as an input, such as airlines, and industries exposed to consumer spending. These fundamental relationships are consistent with industry rotations during historical oil price spikes.
For US equities, the bigger risk is a sustained period of severe oil disruption that weighs on economic growth. Every 1 pp change in real US GDP growth corresponds to a 3-4% change in S&P 500 EPS in our top-down model.
In addition to the trajectory of oil, S&P 500 earnings will depend on the trajectory of AI investment and monetization. The Energy sector’s share of S&P 500 earnings has declined to 4% today from 15% 20 years ago and almost 30% in 1980. Even combined with the earnings weights of the oil-sensitive Consumer Discretionary (8%) and Consumer Staples (5%) sectors, the group accounts for less than half the collective S&P 500 earnings contribution from Information Technology (25%) and Communication Services (13%). (…)
Consensus estimates suggest NVDA alone will account for 24% of S&P 500 EPS growth in 2026. During the last few months, hyperscaler capex guidance and the earnings outlooks for chip and memory stocks have both surged higher. For the group of seven stocks, GS equity analysts have raised their collective 2026 EPS growth forecast by 9 pp to +41%, with increased earnings for the chip companies more than offsetting headwinds to hyperscaler earnings from increased depreciation.
We estimate that AI investment and AI cloud services accounted for about 25% of S&P 500 EPS growth in 2025 and will account for roughly 40% of EPS growth in 2026. This boost should decline to approximately 25% in 2027.
