Iran deal, inflation, AI all pull markets in different directions

MANHATTAN (CN) — Key inflation data, worries about how far artificial intelligence stocks can run and ongoing developments in Iran led to disparate results in U.S. indices this week.

Earlier in the week, concerns of increasing computer chip prices rattled tech-focused investors, causing many cloud-based and artificial intelligence company stocks to drop. As a result, the tech-heavy Nasdaq and several Asian markets posted large drops earlier in the week.

On the flip side, falling oil prices due to the tentative Iran ceasefire deal — despite accusations by President Trump on Friday that Iran violated the deal — motivated other investors, pulling the Dow Jones Industrial Average and S&P 500 slightly higher even as the Nasdaq fell.

By the closing bell on Friday, markets again moved in divergent paths, with the Dow gaining 294 points for the week, the S&P 500 dropping 148 points, and the Nasdaq falling 1,220 points.

“Even if the AI boom turned into a bust, the ‘non-tech’ parts of the stock market could conceivably shrug it off for a while, as they have this week,” Thomas Matthews, head of markets for Asia at Oxford Economics, wrote in an investor’s note on Thursday.

Inflation data this week gave investors what they expected but didn’t want: bad news.

Personal consumption expenditures increased by 0.7% last month, according to the Bureau of Economic Analysis. Year-over-year headline PCE inflation rose to 4.1%, and core inflation hit 3.4%, the highest it has been since October 2023.

The personal savings rate also remained at 3% last month, the same as it was in April and the lowest since June 2022.

The PCE — considered the metric most highly watched by the Federal Reserve to determine if inflation is too high — nearly solidifies economic forecasts that the central bank will not cut rates in 2026, as it had been expected to do just six months ago.

“The first half of the year markets were able to overcome the headwinds of higher inflation … because corporate profits were so outstanding,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a statement.

“It’s our expectation that inflation will start going lower now that the Strait of Hormuz has reopened and oil prices are coming down,” he said. “So that may alleviate some of the pressures on the Fed, but next month’s data needs to be lower than what we are seeing today if that is going to be the case.”

In good news, the gross domestic product estimate for the first quarter of 2026 was revised back up to 2.1% annualized after the second estimate had dropped to 1.6%.

However, experts say the upward revision came mostly from lower import growth. Consumer spending was also shown to be lower, indicating the second-quarter GDP could be equally weak.

“Overall, the U.S. economy remains resilient, but the foundation of growth has become narrow,” said Gregory Daco, chief economist at EY-Parthenon, who predicts real GDP growth to hover just under 2% for the rest of this year and all of next.

The latest consumer sentiment report from the University of Michigan also came in as expected, with a slight rise to 49.5 points. It is still 18% lower than the same time last year.

Inflation remains a hot topic among consumers, with the third straight month of more than half of consumers saying unprompted that high prices are weighing down their personal finances, said Joanne Hsu, the survey director.

“While consumers certainly welcomed the recent decline in gas prices, the persistence of high prices overall continues to weigh on their budgets,” Hsu said in a statement. “Consumers remain quite worried about the prospect of inflation eroding their living standards in the year ahead.”

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