Stocks are back at records, but one CIO says investors are overlooking a major change in the post-Iran-war market
Stocks are back at record highs, but investors might not be pricing in one major change in the post-Iran war market landscape.
Tom Graff, the chief investment officer of wealth advisory firm Facet, told Business Insider that investors aren’t acknowledging the impact the war has had on the trajectory of Federal Reserve policy.
“A lot of people are not thinking as much about the Fed as they should,” Graff said. “The fact that we’ve taken two Fed cuts out of the interest pricing for the rest of this year is pretty meaningful for the stock market.”
Markets have gone from pricing in as many as three cuts this year to just one or even zero cuts. The appointment of a new Fed chief might not change that outlook much. Kevin Warsh, Donald Trump’s pick to succeed Jerome Powell, struck a more hawkish tone than many expected in his testimony to Congress last week, further complicating the outlook for rates.
After two months of war, two-thirds of investors expect rates to hold steady through year-end, while only roughly 32% expect cuts, according to CME’s FedWatch tool.
This shift in rate cut expectations has been driven by the war in Iran, and renewed worries about inflation that could come with spiraling energy costs.
Oil prices have surged since the start of the Iran war, though not quite as high as some expected. Trump himself said he was surprised oil did hit $200 per barrel.
Still, with a lasting peace deal not yet hammered out, WTI oil is trading around $96, a more than 40% jump from prewar levels.
Fed risk isn’t priced in
The shift in rate expectations is especially important considering that several top Wall Street firms cited Fed cuts in their bullish outlook for the stock market heading into 2026.
Graff explained that investors are overlooking that the Fed is much more constrained in what it can do as a result of the economic impact of the war in Iran than it was at the start of the year.
“That’s okay if economic data is looking better,” he said. “It’s going to be problematic if economic data starts to look worse, but the Fed feels almost hemmed in by the fact that oil prices are so high they don’t want to cut rates.”
He warned that Fed-related risk isn’t “super priced in” at this point, with stocks cruising at records
Top commentators flag higher-for-longer rates
Moody’s top economist Mark Zandi has voiced similar concerns.
“At the start of the year, GDP was set to get a boost from deficit-financed fiscal stimulus and more Fed rate cuts. Job growth would resume, and unemployment would stabilize. Hard to see this happening now,” the Moody’s Analytics chief economist said.
” Even if the Iran War winds down and oil prices recede quickly, the fallout will ensure there is no GDP pickup or job growth this year. Unemployment will rise further, and already considerable recession risks will worsen,” he added.
Meanwhile, investing legend Mohamed El-Erian also signaled that expectations are shifting for global central banks to keep policy rates higher for longer due to Iran-war price shocks.
“The current situation represents more than a simple price shock; it also involves a ‘second-round’ adverse demand shock. Beyond these immediate economic effects, there is the lingering risk of spillovers into financial instability,” the former Pimco CEO wrote.
“All of this underscores the uncertain outlook: central banks will be navigating a series of judgments which, I suspect, will likely (or should) be adjudicated by a single, sobering question: “Which is the least unrecoverable mistake we can make?”” he outlined, adding the the Fed is in an especially difficult spot given its dual mandate.