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The Iran conflict is creating powerful stagflationary impulses through simultaneous supply and demand shocks, but deescalation appears increasingly likely as Trump faces deteriorating poll numbers and Congressional resistance to massive war spending. While ending the conflict would be positive for equities (especially given oversold conditions and negative sentiment), the SPX was already facing stiff resistance around 6900-7000 even before Iran due to private credit concerns, AI doubts, and the massive IPO backlog. The best-case scenario right now is a recovery back to 6900, representing only about a 6% rally from current levels, meaning markets need to be kept on a short lease.
Trump administration appears poised to extract itself from the Iran conflict more aggressively as resources are expended at alarming rates and Congress resists a $200 billion supplemental package (WSJ). Iran continues demonstrating durable ability to wage economic terror throughout the Gulf, but the Pentagon is running out of targets within days, potentially allowing the administration to declare victory. The US walking away without militarily opening the Strait of Hormuz avoids dramatic escalation, as there's no easy military solution for securing the waterway (WSJ, confirmed by Trump's social media posts). Iran's reparation demands could be met through temporary compliance with Hormuz toll requirements, adding just a few dollars per barrel of oil.
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