Surprising inflation data douses current market rally (1:35)
The financial landscape is shifting as veteran analyst Ed Yardeni updates his forecast for what he describes as "fast-moving times."
Citing the escalating conflict between the U.S. and Iran, Yardeni has increased the probability of a U.S. market meltdown to 35% for the rest of 2026. This is a significant jump from his previous estimate of 20%.
As the risk of a sharp selloff grows, the strategist has simultaneously lowered the odds of a "meltup"—a rally driven by investor excitement rather than economic facts—from 20% to just 5%. This shift suggests a growing concern that a prolonged Middle East war will squeeze family budgets and eat into corporate profits.
Related: Jim Cramer sees no path to de-escalation in U.S.-Iran war
Echoes of a 1970s energy crisis
For many investors, current events are triggering memories of the 1970s. That era was defined by "stagflation," a painful mix of high oil prices, weak jobs, and slow economic growth. History seems to be repeating itself as the U.S.-Israel war on Iran has pushed crude oil prices above $100 a barrel for the first time since 2022.
The pressure is mounting across the economy. Recent data shows a surprise dip in the job market, continuing a year-long trend of stagnant employment gains. Meanwhile, economic growth targets are being scaled back. Initial estimates for first-quarter GDP have dropped to 2.1%, down from an earlier projection of 3.2%. In a note, Yardeni warns that if investors begin to anticipate a full return to 1970s-style conditions, a "bear market" becomes a very real threat.
Popular on TheStreet Roundtable:
Oscar-nominated Hollywood actor warns Bitcoin is going to die
Dubai issues cease-and-desist notice to crypto exchange
Jim Cramer has one-word response to new Robinhood IPO
The stranglehold on global trade
At the center of this volatility is the Strait of Hormuz. Iran’s Islamic Revolutionary Guard Corps has targeted tankers in this vital waterway, which handles 20% of the world's crude oil supply. This "de facto blockade" is a major driver behind the spike in energy costs.
While Western powers are attempting to calm the market by releasing oil reserves and providing naval escorts for ships, the risks extend beyond fuel. The region is also a top exporter of fertilizer. Yardeni cautioned that if shipping remains blocked through early April, farmers may be forced to switch products or reduce fertilizer use, creating inflationary risks for food prices as well.
Related: Iran’s Hormuz shutdown puts major economies at risk
Economic resilience and the strong dollar
Despite the high-stakes environment, the U.S. dollar has emerged as a clear winner, gaining strength against almost every major currency. Other traditional "safe havens," such as gold and the Swiss franc, have recently slipped. Yardeni notes that the Federal Reserve is currently "stuck between Iran and a hard place," forced to balance the risk of rising inflation against the threat of growing unemployment.
However, there is still room for optimism. Yardeni points out that the U.S. is now the world’s leading oil producer, making the economy less vulnerable to imports than it was in the 1970s. His "base case" remains the "Roaring 2020s," a decade of growth fueled by high productivity, to which he still assigns a 60% probability for this year. In his view, once the Strait of Hormuz is safe again, the bull market for stocks should resume its upward path.
Related: Wall Street's 'fear index' hits highest point since October