The US stock market surged to yet another record high on Thursday, a new milestone that suggests a rising tide is lifting all equity sectors. Yet reviewing the market through a risk-factor risk lens tells a more nuanced story, revealing a wide dispersion of trends that have emerged since the conflict with Iran began on Feb. 28, based on a set of ETFs through yesterday’s close (May 14).

The results suggest that much of the difference between equity-portfolio strategies during the war-regime period can be traced to factor allocations. For example, among the winning strategies of late there’s a good chance that the portfolios have relatively high allocations to the momentum factor, intentionally or otherwise.

The momentum factor is the clear leader, outperforming the rest of the field by a wide margin. The iShares MSCI USA Momentum Factor ETF (MTUM) has surged 21.6% since the attack started nearly three months ago. The next-strongest performer is large-cap growth (IWV) with a 16.3% rally. Both funds are posting sharply higher gains vs. the market benchmark via SPDR S&P 500 ETF (SPY), which is up 9.4% since Feb. 28.

Most equity factors are trailing the broad market (SPY), including one downside outlier. The low-volatility factor has delivered especially poor results since the start of the conflict, which has shifted to a precarious stalemate that continues to block energy exports from the Gulf. The iShares MSCI Minimum Volatility ETF (USMV) has lost 2.3% since Feb. 28.

Despite the headline strength in equities, the widening gap between factor winners and laggards underscores how uneven the market’s internal dynamics have become. Momentum’s dominance and low volatility’s slump suggest investors are rewarding exposure to persistent trends while shunning defensive positioning, even as geopolitical risk remains elevated. That divergence is a reminder that record highs can mask shifting fault lines beneath the surface—fault lines that may matter far more if the current geopolitical stalemate breaks in either direction.

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The market premium for the US 10-year Treasury yield over a fair‑value estimate remained modest in April but has been edging higher after falling to a near‑equilibrium level late last year. The threat of higher inflation stemming from the Iran conflict remains a risk factor, though the repricing of the market premium has been modest so far.

The gradual shift may begin to accelerate in the months ahead as inflation risk moves to center stage in the bond market. The 10‑year yield rose to 4.47% yesterday (May 13), the highest close since last August. The recent upside bias suggests that the pickup in inflation triggered by the Middle East turmoil is starting to alter sentiment for fixed‑income securities.

The Labor Department reported this week that consumer and wholesale inflation continued to post sharp increases in April.

“Inflation is sticky and accelerating. The core reading confirms a deeper structural trend, especially in services,” said David Russell, global head of market strategy at TradeStation. “The Hormuz crisis is aggravating the problem, but this goes way beyond oil.”

The market premium relative to The Capital Spectator’s fair‑value estimate of the 10‑year yield ticked up to 35 basis points last month. That remains modest by historical standards, but if inflation stays elevated—or shows signs of rising further—the premium will likely increase in the months ahead.

“

What we’ve seen is investors pricing in higher long‑term inflation into what they want to receive from lending to the government,” said Luke Tilley, chief economist at Wilmington Trust.

By late 2025, the surge in the 10‑year premium associated with the 2021–2022 inflation spike had faded to nearly zero. But the calculus is changing as the conflict with Iran continues and threatens to become a protracted affair that keeps Gulf energy exports blocked and inflation elevated.

A quick resolution that allows exports to resume would likely keep the yield premium modest. But with diplomatic efforts at a standstill and US threats to resume military operations if Iran doesn’t compromise, the timeline for an end to the conflict remains unclear. As a result, the yield premium—and interest rates more broadly—appear poised to rise in the near term.

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President Trump is warning that the US could restart strikes on Iran, a stance that reads less like a negotiating tactic and more like the opening move in a drawn‑out standoff. A few days ago, he described the fragile cease-fire as being on “massive life support.” In other words, a long, grinding stalemate appears to be taking shape. That’s a threat to the global economy because as the impasse drags on and energy exports from the Gulf remain blocked, the world’s oil supply shrinks and scarcity risks rise.

“From the point of view of energy, this is a snowball — and every week that passes, you have tighter markets,” says Jaime Brito, executive director of refining and oil products at Dow Jones Energy.

Oil prices reflect that uncertainty. The US benchmark, West Texas Intermediate, traded near $107 a barrel yesterday — a middling range following the surge since the war began.

Brent crude, the global benchmark, is trading closer to its upper range, reflecting the higher level of vulnerability for Europe and Asia related to oil imports relative to America’s domestic oil supplies. A break higher from the current $107 level for Brent would signal that the market is starting to price in a higher risk that the conflict’s stalemate will have deeper and longer‑lasting effects on the global economy, including inflation.

Recent developments behind the scenes aren’t encouraging. A troubling report suggests Iran has tightened its control over the Strait of Hormuz after establishing a new Persian Gulf Strait Authority and positioning itself as the sole gatekeeper for this strategic energy corridor.

According to Lloyd’s List Intelligence, the agency is now demanding that vessels submit application forms for passage — an effort to control transit approvals and collect tolls. Iran’s Islamic Revolutionary Guard Corps (IRGC) “has imposed a de facto ‘toll booth’ regime in the Strait of Hormuz, requiring vessels to submit full documentation, obtain clearance codes and accept IRGC‑escorted passage through a single controlled corridor.”

The immediate economic threat is inflation, which continues to rise. Headline consumer inflation increased 3.8% in April from a year earlier — a three‑year high, the Bureau of Labor Statistics reported on Tuesday. The main driver: higher energy costs.

“Inflation is the key drag on the U.S. economy now,” said Heather Long, chief economist at Navy Federal Credit Union. “This is hurting Americans. There is a real financial squeeze underway. For the first time in three years, inflation is eating up all wage gains. This is a setback for middle‑class and lower‑income households, and they know it.”

Inflation will ease once the Middle East crisis is resolved. Unfortunately, the path out of the stalemate isn’t clear, and the US — and the West — increasingly looks boxed in. A resumption of military strikes might break the gridlock, but Iran’s regime has already shown it can take a beating and still maintain its stranglehold over Gulf exports.

Meanwhile, President Trump’s summit with China’s President Xi Jinping may yield a breakthrough, according to some analysts. But before departing Washington for Beijing, Trump downplayed the potential for engaging China to persuade Iran to open the Strait.

“I don’t think we need any help with Iran,” Trump said. “We’ll win it one way or the other, peacefully or otherwise.”

Exactly what that means — and on what timeline — is unclear. In the meantime, the clock is ticking, and the risk of a deeper, longer energy shock continues to rise.

President Trump said the ceasefire with Iran is on “massive life support,” which suggests that inflation risk will remain elevated.

Oil prices continue to trade above $100 a barrel for the US crude benchmark as Trump has become increasingly frustrated with Iran’s negotiating positions to formally end the conflict that is keeping Gulf energy exports blocked. This disruption is keeping prices high and driving up headline measures of inflation. With no clear exit strategy on the horizon, markets are pricing in higher odds of persistent inflation.

One metric to watch is the ratio of the iShares TIPS Bond ETF (TIP), a portfolio of inflation‑indexed Treasuries, to a similar fund that holds conventional government bonds (IEF). As this ratio rises, it implies that the market is demanding a higher inflation premium. Notably, the ratio is trading near the peaks of recent years. A decisive break above this level (red line in the chart below) would signal stronger concern that inflation risk could run longer and higher than recently expected.

Today’s April report on consumer prices is expected to highlight another month of hotter inflation. The Cleveland Fed’s current inflation nowcast indicates that the rise in headline CPI will continue through May.

Betting markets are pricing in higher odds that inflation will top 4% this year, substantially higher than the 3.3% year‑over‑year trend reported for headline CPI through March.

The Treasury market’s implied inflation forecast is also near multi‑year highs, based on the spread between inflation‑indexed yields and their nominal counterparts. The 5‑year forecast is 2.67% as of May 11, just below last week’s 2.72% peak. A sustained push above that peak would highlight the market’s growing confidence that inflation risk will persist.

Perhaps the final straw in the repricing of inflation risk will be rising expectations that the Federal Reserve will increase interest rates to combat the shift. For now, that remains a low‑probability scenario based on Fed funds futures, which continue to price in high odds that the central bank will leave its target rate unchanged for the next several policy meetings.

That view may persist if core readings of inflation remain relatively stable, as they have recently. These measures of pricing pressure tend to hold more sway at the Fed. But the longer the Middle East conflict continues and energy exports remain blocked, the higher the odds that the status quo for Fed expectations will give way to a hawkish pivot. A sign that this shift is gaining momentum: core inflation continues to edge higher.

US economic growth is expected to hold steady at a 2%-plus pace in the second quarter, according to the median nowcast from several estimates compiled by CapitalSpectator.com. This early estimate for the current quarter suggests that the economy may be more resilient to the effects of the Middle East conflict than previously assumed.

The main threat is inflation, which jumped sharply in March and is expected to rise further in tomorrow’s April report from the government, based on the outlook for the year-over-year trend. The concern is that as the energy supply shock continues to reverberate, growth will suffer.

The current median nowcast for Q2, however, suggests that real (inflation-adjusted) output will be largely unchanged relative to Q1. Today’s estimate indicates a 2.2% annualized increase for Q2, modestly above the 2.0% rise reported for Q1, which marked a solid recovery from Q4’s weak 0.5% gain.

Uncertainty surrounding the Iran war—currently in a precarious state of peace—still leaves plenty of room for debate about how the remainder of the quarter will unfold, and whether the current nowcast will hold. A bright spot is the labor market. US hiring rose more than expected in April, suggesting that the economy may be more resilient to the conflict than previously estimated.

The gain in employment is “evidence of the underlying resilience of this economy and of this labor market, despite all of the slings and arrows of outrageous concerns about the Middle East and unemployment and inflation and the Fed,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. But “one month does not a new trend establish. There’s been a lot of month‑to‑month volatility in the jobs market over the past year. I’m not sure that’s completely gone away. We get another two or three months of solid job gains, then I feel a little bit more comfortable.”

Comfort will likely be in short supply as long as the threat of war hangs over the Middle East and energy exports from the Gulf remain blocked.

President Trump on Sunday rejected Iran’s latest proposal to end the war, writing on social media that it was “TOTALLY UNACCEPTABLE!”

The data may be steady, but the backdrop is anything but. The coming months will reveal whether the economy can outrun the shadows gathering overseas.

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Money is everywhere in our daily lives. It lurks in the swipe of a card at the grocery store, in looming student-loan debts, in the prices of things we want, and in our subconscious navigation of the modern world. Money is an invisible convenience that saves us, as a society, the hassle of bartering for goods and services—a reflection, in our pockets and on our phones, of the hard facts of scarcity and desire. Or is it something more? In this revelatory book, economists J. W. Mason and Arjun Jayadev explain how and why money is so deeply misunderstood by the world it dominates—as well as the dangerous social implications of this misunderstanding.

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Diversifying into foreign bonds hasn’t provided much benefit to U.S. investors since the Middle East conflict began, with one exception: high‑yield corporate bonds issued by firms in emerging markets.

Bucking the trend since the conflict started on Feb. 28, the VanEck Emerging Markets High Yield Bond ETF (HYEM) is a rare bright spot in international fixed income from a US-dollar-based investment perspective. The fund is up 0.9% over this period, making it an outlier in a market otherwise marked by red ink.

HYEM’s performance stands out, though it generally mirrors the gains in U.S. junk bonds (JNK). By comparison, investment‑grade bonds—both corporate and government, in the US and abroad—are underwater since Feb. 28.

Why the disconnect? High‑yield bonds carry more risk than investment‑grade debt. One might have expected investors to flock to higher‑quality bonds as a safe haven and avoid junk bonds. Instead, the opposite has occurred.

One explanation: junk bonds have rallied as investors chase higher yields while war‑driven uncertainty eases, whereas investment‑grade bonds have lost ground amid rising interest‑rate expectations and inflation concerns.

Markets broadly began to rebound in late March. Initially, most bond sectors participated, but by mid‑April high‑yield and investment‑grade debt diverged sharply.

For example, HYEM has recovered all of its war‑related losses and even reached a new high earlier this week. A broad measure of U.S. investment‑grade bonds (BND)—including Treasuries and corporates—stalled in mid‑April and remains below its pre‑war close.

Analysts say high‑yield bonds have regained appeal thanks to their sizable coupons, which provide a meaningful yield cushion against market volatility. With fears of a worst‑case geopolitical escalation easing, investors have shown a renewed appetite for risk and rotated back into these higher‑return assets.

The divergence shows how quickly fixed‑income dynamics can shift when geopolitics and inflation collide. It also underscores why diversification across bond sectors matters—because in uncertain times, markets have a way of defying even the most confident forecasts.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno