The 'S fear' and the Middle East crisis, the United States economy trapped in a stalemate

Silent Market - Investment Sentiment Numbed Amidst the Repetition of Crisis

Recently, the US stock market has been maintaining a relatively stable trend despite repeated concerns about the possibility of economic slowdown. The so-called 'S fear'—Stagflation—hangs over the market, but major stock indices have rebounded, and bond yields are also showing calm patterns, contrary to expectations. The Financial Times described this as "the market is silent." This reflects not so much a sign of optimism, but rather a numb response from investors who have become desensitized to repeated shocks. Over the past few years, the US market has endured multiple shocks, including the pandemic in 2020, rapid rate hikes in 2022, and the banking crisis in 2023. In the process, the market has built resilience against crises, but this sentiment is exacerbating the disconnection with the real economy. While consumption and employment are on a recovery path, the growth of manufacturing and services is slowing, and retail sales and corporate investment are exhibiting significant volatility. Beneath the superficial calm, latent instability continues to stir.

Shock from the Middle East - The Reconnection of International Oil Prices and Inflation

In this context, the geopolitical risks in the Middle East are emerging as a new variable for the U.S. economy. In June 2025, tensions between Israel and Iran sharply escalated following Israel's surprise attack on Iran's nuclear facilities, resulting in a steep rise in international oil prices. Brent crude prices jumped over 7% in just one week and briefly rose by more than 11%. The possibility of Iran blocking the Strait of Hormuz has further intensified upward pressure on oil prices. The surge in international oil prices is once again igniting inflationary pressures in the U.S. Although the country's reliance on energy imports has decreased compared to the past, global crude oil prices still have a significant impact on production costs, logistics expenses, and consumer prices. This is exerting upward pressure on inflation indicators, which had been showing stability (such as PCE and CPI), and it leaves open the possibility of renewed price increases.

Policy Dilemma – Between Expectations of Interest Rate Cuts and Caution

The Federal Reserve (Fed) has indicated the possibility of interest rate cuts within the year, based on the judgment that inflation has been easing. Fed officials, including Chairman Jerome Powell, have emphasized a "data-driven gradual reduction," maintaining a cautious approach. In fact, the dot plot from the FOMC suggests the likelihood of up to two rate cuts by 2025. However, concerns about a resurgence of inflation due to rising oil prices are prompting a reassessment of this trend. According to internal analyses from the Fed, if oil prices rise by $10 per barrel, the PCE price index may increase by 0.2 percentage points, and economic growth could slow by 0.1 percentage points. Against this backdrop, the timing for interest rate cuts may be pushed back to after September, and the possibility of further rate increases could be discussed again. This policy dilemma is adding confusion to the market. Investors are adopting a wait-and-see attitude, as they must consider both the potential for inflation to reignite and the Fed's possible responses, making it difficult for them to determine their investment direction.

Stalemate in the American Economy - Seeking Balance Amid Uncertainty

The current U.S. economy appears to be in a deadlock, entangled by three factors: 'slowing growth', 'geopolitical risks', and 'policy hesitation'. The real economy maintains a steady recovery based on solid consumption and employment, but the overlap of external shocks and uncertainties in monetary policy makes the mid- to long-term outlook unclear. Some financial institutions, such as RBC, warn that the S&P 500 index could correct by as much as 20% if the Middle Eastern situation worsens. On the other hand, there is also a strong counterargument suggesting that the robust consumer and employment data in the U.S. will limit the impact of any shocks. These opposing views suggest that the U.S. economy is currently at a 'turning point'. The future direction will hinge on several critical variables—the trajectory of international oil prices, the easing of tensions in the Middle East, summer employment and consumption indicators, and the Federal Reserve's policy direction. While uncertainty remains, both the market and policymakers are aiming for a 'cautious yet orderly stability', and this attitude is leading to efforts toward balance even amid chaos.