GUEST BLOG / By Angelo Kourkafas, CFA, Senior Global Investment Strategist is responsible for analyzing market conditions for Edward Jones Company--In many ways, the year has progressed largely in line with expectations, with U.S. economic resilience persisting, the labor market stabilizing, AI-driven investment supporting growth, and fast-rising corporate profits driving equity gains. However, the outlook for interest rates shifted materially in the first half since geopolitical tensions in the Middle East emerged.
As we kick off the second half of the year, renewed hostilities and a re-escalation in the U.S.–Iran conflict are once again pushing oil prices toward $100, pressuring yields and bond prices. We examine how recent developments are reshaping the outlook for rates and the Fed ahead of the July meeting, and we provide our first read on tech earnings amid growing scrutiny of AI-related spending.
Oil and yields are pressing higher
A fresh round of escalation in the U.S.–Iran conflict is driving oil back toward the early June highs, reversing much of the progress made after the April ceasefire and the June 17 Memorandum of Understanding. Energy markets have, to some extent, defied earlier fears of a sharper spike, with countries drawing down inventories, softer Chinese demand, and alternative shipping routes helping keep supply flowing.
However, that resilience is now being tested again. The conflict appears to be widening, with Houthi attacks targeting Red Sea shipping routes and raising the risk of disruption to one of the key alternatives to the Strait of Hormuz, potentially further tightening the flow of oil.
In fixed income, bond markets are under pressure as yields continue to grind higher, with the 10-year Treasury breaking above 4.70% for the first time since January 2025 and 30-year yields revisiting the May highs, their highest levels since 2007. In many ways, this is déjà vu for markets: renewed strength in oil is reigniting inflation concerns and reopening the debate over whether the Fed may need to respond.
Not inevitable, but door for a rate hike is opening
The oil impact of the conflict on headline energy inflation is straightforward and supports the view that the consumer price index (CPI) may have peaked in May if oil prices do not break to new highs. However, the pass-through into core inflation—which excludes food and energy—is slower and more uncertain. The longer the conflict persists, the greater the risk of second-round effects, with pressures extending beyond energy into broader categories. Importantly, these new price pressures are arriving at a time when the Fed is emphasizing less patience after more than five years of above-target inflation.
With the next Fed decision on Wednesday, investors are closely watching for signals on the path forward. We think the soft consumer and producer inflation readings in June buy the Fed some time to assess how energy disruptions and inflation evolve over the summer. Housing-related inflation continues to cool, and wage growth—the largest input cost in services— is not inflationary when adjusted for productivity gains. Moreover, the new tariffs announced are broadly consistent with the previous tariff levels that expired and should not trigger a renewed rise in goods prices, in our view.
That said, inflation is still too high for comfort, and prior concerns around labor-market weakness have further diminished. Last week’s initial jobless claims fell to 187,000, the lowest level since 1969, underscoring muted layoffs and a stable labor market. This gives hawkish members of the Fed committee more scope to focus on the inflation mandate.
Against that backdrop, we expect the Fed to hold rates steady at 3.50%–3.75% in July, though dissent is possible. September, however, looks more like a live meeting, with the probability of a rate hike rising, in our view, if the conflict persists and oil prices continue to trend higher. While tighter policy cannot offset a supply-driven inflation shock, it can help anchor inflation expectations at a time when growth is being supported by resilient consumer spending and an ongoing AI investment boom.
The bottom line
We believe rising oil prices and higher yields represent an emerging risk that could influence the Fed’s policy path in the months ahead and contribute to greater market volatility as we head into the seasonally softer August and September period. However, underlying economic and corporate fundamentals remain constructive, in our view, supporting a cautiously optimistic outlook for the back half of the year.
We continue to recommend maintaining exposure to AI-related allocations, while complementing them with more diversified and differentiated sources of return, in line with investors' risk and return preferences. For cyclical exposure, we favor mid-caps, industrials, and international value-style investments. Within AI, we like communication services and emerging-market equities, while we expect rotations both within and beyond tech.
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