Published May 15, 2026
For many investors, the recent bout of inflation is their first experience with the stubborn beast. The United States has been fortunate over the past three years that a booming AI trade has more than neutralized the negative stock market effects of inflation.
Rising commodity prices, including a sharp rise in oil prices, have been quickly waived off by investors who have chosen to focus on a different type of inflation – the pricing power of semiconductor companies and other AI-driven industries. But as the recent glowing earnings reports go in the books and the Strait of Hormuz remains mostly impassable, investors will certainly turn back to the lingering damage of higher commodity prices. An inflation print earlier this week posted a sharp rise in the inflation rate. The chart below shows the abrupt upward thrust of inflation as rising commodity prices begin to ripple through to consumers.
After working their way downward in anticipation of inflation having been tamed, rates are now beginning to follow inflation higher with one Fed Governor noting this week that maybe the Fed will have to increase short-term rates and return to more aggressively battling inflation. This chart shows the 5-year U.S. Treasury yield, which has shot higher since the launch of the War with Iran.
Putting this in a much broader context, we can see the decades long decline in interest rates after the taming of the “oil shock” 1970s inflation. The zero interest rates of the Covid period followed by the subsequent period of misaligned global supply chains and returning inflation. It could certainly be argued that interest rates are merely returning to a more “normal” range of 4-5%.
However, this week’s sharp uptick suggests that inflation could be settling in again. Once the inflation beast takes root, it is very hard to unearth.
Market Update
A meeting between President Trump and Chinese President Xi took center stage this week with investors hoping the two superpowers might find a way to break the impasse in the Strait of Hormuz as well as announce major new deals or initiatives. Monday Trump dismissed the latest Iranian peace proposal sending oil prices upward. But stocks showed little reaction with investors preferring to wait for the Presidential summit. The first inflation report since the War began found prices rising at a +3.8% annual rate with the “core” inflation rate rising more than expected. The hotter report sent stocks fractionally lower with oil prices rising back above $100/barrel. Also on Tuesday, Kevin Warsh was confirmed as the next Federal Reserve Chairman by the Senate. Warsh will be under pressure from President Trump to lower interest rates, though the spike in inflation readings this year has investors no longer seeing any chance of such a move. Wednesday, optimism as the China-U.S. summit began sent stocks higher with tech stocks continuing to lead the way. The Nasdaq 100 (QQQ) rose to another record high with a +1.2% gain on strength once more from semiconductor shares. A sharp rise in shares of tech company Cisco coupled with an ebullient IPO reception from AI computer maker Cerebras Systems to push stocks up almost +1% Thursday. But the rally ran into trouble Friday. A bond market selloff overnight sent long-term interest rates to their highest level in three years crossing above the 5% threshold. Interest rate sensitive sectors suffered in Friday’s trading. A lack of substantial deal announcements coming out of the China-U.S. summit caused a bit of a pullback in tech shares. The result was a losing stock market with the S&P 500 slipping -1.2% and essentially giving up the gains from earlier in the week.
Stocks had another strong winning week going until Friday’s interest rate tantrum derailed the gains. The S&P 500 closed the week with a +0.21% change. The Nasdaq 100 (QQQ) dipped -0.32%. More interest rate sensitive small cap stocks tumbled -2.31% for the week with all of the loss occurring Friday.
Warm wishes and until next week.