Monday, April 27, 2026
The projected Federal Reserve script has been flipped, and the stock market doesn’t seem ready.
A series of things drove markets higher. They include the AI evolution, record share repurchases, and an ongoing Federal Reserve rate easing cycle.
As a result, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite are all higher. However, the inflationary impact of the Iran war is tossing a huge monkey wrench into the central bank’s rate easing cycle and that’s bad news for Wall Street.
Halting or reversing cuts to interest rates would represent a potential worst-case scenario for a historically expensive stock market.
With the stock market entering 2026 at its second priciest valuation since 1871, according to the S&P 500 Shiller’s price-to- earnings ratio, investors have been counting on additional interest rate cuts to fuel growth.
The Schiller PE has averaged 17.35 over the last 155 years. It almost hit 40 this year and has been in the 30s since 2023.
History has made clear that extended valuation premiums aren’t sustainable. After the Shiller PE peaked at 44 in December 1999, the S&P 500 and the Nasdaq shed 49% and 78% of their respective values.
But interest rate cuts help ease the pressure. They encourage business borrowing, ultimately leading to more hiring, innovation, and acquisitions.
However, the Iran war is changing the calculus.
Since the military attacks on Feb. 28, oil prices soared. This is in direct response to Iran’s closure of the Strait of Hormuz, which is a vital supply line for global energy.
The oil price shock is expected to resonate throughout the US economy and raise inflation in the months ahead. And if we go from rate easing to rate hiking, arguably the bedrock of this historically expensive stock market will be fractured beyond repair.
Simply put, if the Fed script flips, the Wall Street bull market rally may be over.
Daniel A. White is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Daniel A. White & Associates and CoreCap Advisors are separate and unaffiliated entities.