Markets Rise on Signs of De-escalation; Fed Remains Cautious

with Adam Phillips, Managing Director, Investments 

Not surprisingly, many clients and advisors continue to ask how markets are responding as the conflict in the Middle East enters its fourth week. While the situation remains fluid, there was some encouraging news to start this week.

As of Monday morning, markets responded positively to reports that the United States and Iran may be discussing steps to de-escalate tensions and reopen the Strait of Hormuz. Equities moved higher, with markets up roughly 1.5% to 2% early in the day. At the same time, oil prices declined by about 10%, and the U.S. dollar gave back some of its recent gains.

While this is certainly a positive development, it is important to note that confirmation from Iranian leadership has not yet been established. As we have seen in recent weeks, markets are moving quickly in response to headlines, and conditions can change rapidly.

Markets are reacting quickly to signs of de-escalation, highlighting how fast sentiment can shift.

This serves as a reminder that during periods of geopolitical uncertainty, markets often move from headline to headline. Even a single announcement can significantly shift market direction, which is why maintaining a disciplined, long-term investment approach remains important.

Looking back to last week, the Federal Reserve held its latest policy meeting. As expected, the Fed did not cut interest rates. This meeting also included updated economic projections covering inflation, employment, growth, and the expected path of interest rates over the coming years.

The Fed acknowledged the challenges of the current environment. Chairman Jay Powell noted that forecasts should be taken with caution, as policymakers are navigating what he described as a “fog of war.” With so much uncertainty, the Fed is likely to remain cautious in its approach to monetary policy.

At the start of the year, markets were expecting the Fed to cut interest rates two to three times in 2026. However, rising energy prices and concerns about inflation have led to a shift in expectations. At this point, markets are no longer pricing in rate cuts this year.

Expectations for Fed rate cuts have largely been pushed out as inflation concerns remain.

If energy prices begin to decline and inflation pressures ease, the Fed may have room to revisit rate cuts. That would likely be supportive for markets and borrowing conditions. For now, however, policymakers appear focused on maintaining stability until there is greater clarity.

From a portfolio perspective, this environment reinforces the importance of staying disciplined. With such a wide range of potential outcomes and rapidly changing headlines, making short-term adjustments based on emotion can be counterproductive.

Our approach remains focused on long-term fundamentals and data-driven decision making. While markets may continue to experience volatility in the near term, maintaining a consistent investment strategy allows portfolios to navigate uncertainty while remaining positioned for future opportunities.

As always, if you have questions about how current events may affect your portfolio, please reach out to your financial advisor. We look forward to sharing another update next week.

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

The war in the Middle East is entering its fourth week. I'm sure you're getting sick of reading about it, of hearing about it. I'm getting sick of talking about it, but at least this morning I have good news to report on. I should note we are recording this on Monday morning. I think that's really important, just given how fluid the situation is.

But we woke up today, and we saw an announcement from President Trump. He and leadership in Iran are talking about plans to de-escalate the situation and open up the Strait of Hormuz. The market is certainly responding favorably to this announcement. Right now, the market is up between one and a half to 2%.

We are actually seeing the price of oil drop by about 10%, the dollar is fading and giving up some of those recent gains over the last several weeks, since it is that safe-haven trade. So, this is certainly a positive development. We will wait and see what actually comes of this.

I do think it's interesting that we haven't seen. Confirmation from leadership within Iran. But this is certainly a positive, and we know that historically, President Trump and the administration have watched financial markets, and so hopefully we will see things de-escalate here. That would certainly be a positive setup for financial markets.

I think this is just another reminder that when you're in these Geopolitical crises and events you're living, headline to headline. Even if you are inclined to make significant changes to your portfolio, this is why you don't do it, because one post or one announcement can really change everything.

So we will wait to see what comes of this, but certainly a positive development to start the week. As we shift our focus back to last week, we saw the Federal Reserve had its FOMC meeting, which is the Federal Open Market Committee meeting. No surprise, they did not cut interest rates, as I talked about in last week's video.

This was the quarterly meeting where they provided us with an update to the summary of economic projections that includes their expectations of where inflation is heading and the unemployment rate. Economic growth and ultimately where they expect monetary policy, meaning interest rates, to end up at the end of this year, next year, and the following year.

So this was a big meeting, but obviously, they're working through this really cloudy environment right now, just like all of us. I found it was, I found it really interesting that Jay Powell, the Fed Chairman, is at least for another couple of months here. He said that you need to take their projections, their estimates, with a grain of salt because we are all working in this fog of war, and it's just really, really hard to navigate the current environment.

Because of that, they are going to be very cautious with respect to their changes and monetary policy action. So what, what we saw coming out of this is that we, we didn't expect any interest rate cut at this meeting, but coming into this meeting and actually coming into the conflict, we started the year with a market that expected the Fed to continue cutting interest rates by between two and three times in 2026.

And what we've seen is because of the rise in energy prices and the fear that that could. Put upward pressure on inflation. We've actually seen that expectations for Fed rate cuts have really been priced out. We're really not looking at any Fed cuts this year, at least. If the trend continues, obviously, if things do de-escalate, we see gas prices and energy prices come back down, that could put Fed cuts back on the table.

That would certainly be stimulative to asset prices, to things like lending rates or borrowing rates. So we do hope that the Fed can continue cutting rates, but they're not going to they're not going to do that if inflation is still a concern. So we are in this, this environment where it is all very, very fluid.

So we will wait, just like the Fed will, to make sure that any actions we take in portfolios are based on data, and they are done in a thoughtful way, and not based. On emotion. So I will leave it there for right now. Again, if there's any takeaway here, it's that the latest news is a reminder of how quickly things can change here.

We'll be watching an eye we'll be keeping an eye on the, the news out of the Middle East over the next several days. I'll leave it there for now, but if you have any questions, as always, please don't hesitate to reach out to your financial advisor, and I'll see you next week.