The Week the Market Stopped Fearing Inflation
This was a week that should teach you something about how markets actually work. Stocks spent the first half terrified of inflation and the second half looking right past it — and ended higher anyway. The path, not the destination, is the story.
A violent round trip
Tuesday, stocks plunged as President Trump teased fresh strikes on Iran. Wednesday, the May inflation report landed — consumer prices at a three-year high — and the Dow shed more than 950 points, with the S&P 500 sliding to test its 50-day moving average near 7,230. Then it turned. Thursday the market ripped higher, small caps up 3%, and Friday the rally carried into the close. The S&P finished the week around 7,449, net higher, after a round trip that whipsawed nearly everyone caught in between.
The one variable underneath: Iran
Strip away the noise and the whole week ran on a single variable. The Strait of Hormuz is one of the most important oil chokepoints on the planet, and the war had disrupted it — which is why gasoline was up more than 40% on the year and inflation was running hot in the first place. So when the headlines turned, the market turned with them. By Friday, the U.S. and Iran were reportedly close to a peace deal — one that would lift oil sanctions and reopen the Strait within 30 days, potentially signed within days. Oil fell, and stocks decided the inflation scare had a shelf life.
Two hot prints the market looked through
The inflation data itself was genuinely hot. Consumer prices rose 4.2% on the year, and wholesale prices — the producer side — climbed 6.5%, the steepest in nearly four years. That combination normally sinks the market. It didn’t, because both reports said the same thing underneath: strip out energy, and core prices were softer than expected. The scary headline was an oil shock passing through the economy — and the oil shock was the very thing that looked like it might be ending.
The tell: consumers stopped fearing inflation
The clearest confirmation came Friday, from consumers themselves. The University of Michigan’s sentiment index jumped to 48.9, well above expectations and snapping a four-month slide. The number that mattered most was buried inside it: inflation expectations actually fell, with the one-year reading dropping to 4.6%, below what economists had penciled in. When the people getting squeezed at the pump start expecting less inflation ahead, that is the oil shock fading in real time — a forward-looking signal pointing the opposite way from the backward-looking CPI and PPI.
SpaceX soars, software gets punished
The same split — relief on one side, skepticism on the other — showed up in individual stocks. SpaceX went public in the largest IPO in history, with shares soaring more than 20% on debut, the company raising $75 billion, and Elon Musk becoming, on paper, the world’s first trillionaire. On the other end of the mood, software kept getting punished no matter what it reported. Adobe posted record revenue, beat estimates, and raised its full-year guidance — and the stock still fell about 8%, knocked by news that its finance chief is leaving for rival Marvell. Oracle had done nearly the same thing earlier in the week: a record quarter, sold off. In a market nervous that AI will eat into software, good results aren’t earning any forgiveness.
What’s next: the Fed decides
Next week is the one that counts. The Federal Reserve’s two-day meeting starts Tuesday, with the decision Wednesday — its first under new chair Kevin Warsh, who walks into hot inflation prints on one side and falling inflation expectations on the other. The market spent this entire week swinging between betting on hikes and betting on cuts; Wednesday, the Fed starts to answer. And the Iran deal, if it actually gets signed, is the variable sitting underneath that answer.
For five days, the market got handed some of the hottest inflation data in years and rallied — not because the numbers were good, but because it stopped trading the inflation print and started trading the thing causing it. Where inflation has been is settled. Where it goes from here runs through the Strait of Hormuz, and for the first time in months, that path might be clearing.
Not investment advice. WTH Markets is editorial commentary, not financial guidance.
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