Hostilities flare up again in Hormuz, markets tense up, futures market predicts Brent price will break $90 by year-end.

A direct conflict has erupted between Iran and the United States in the Strait of Hormuz, with both oil prices and inflation expectations hitting critical levels. The market is repricing geopolitical risks.

According to Xinhua News Agency and CCTV News, on May 3 local time, U.S. President Trump announced the launch of an operation called "Freedom Plan" to "guide" trapped vessels out of the Strait of Hormuz. On May 4, the U.S. military stated that two U.S.-flagged merchant ships had successfully passed through the Strait of Hormuz. On the same day, Iran launched multiple cruise missiles and drones at U.S. naval vessels and merchant ships under U.S. military "protection." The U.S. military sank six Iranian small boats attempting to obstruct the merchant ships.

Bloomberg columnist John Authers' latest analysis points out that Trump's "Freedom Plan" directly triggered exchanges of fire between the U.S. and Iran, and the roughly one-month ceasefire between the two sides is unraveling.

Tina Fordham of geopolitical risk consulting firm Fordham Global Foresight said, "Iran's renewed missile attack today is a signal—they still have the capacity to inflict pain and will not be forced to submit. The choices facing the U.S. are increasingly clear: either fight a protracted war it does not want, or accept a bad, humiliating agreement."

Oil Prices and Inflation: Two 'Unwelcome Milestones'

The escalation of the conflict has directly pushed up oil prices. According to Bloomberg data, the futures market currently prices Brent crude at $95 per barrel by the end of the year, a new high since the conflict began, surpassing the peak seen during Iran's attack on Qatar's liquefied natural gas facilities. At the beginning of April, this prediction was around $80.

The current Brent crude futures price is around $113.

The changes in the prediction markets better illustrate the shift in market sentiment. According to Polymarket data, the probability of normal shipping in the Strait of Hormuz resuming before the end of June has plunged from 90% two weeks ago to less than 50%.

The oil price shock is also transmitting to inflation expectations. The U.S. two-year inflation swap has risen beyond the Fed's 3% upper target, reaching its highest level since 2022. John Authers notes that with the midterm elections approaching, this will put pressure on the U.S. government, driving it to seek a negotiated solution.

Macquarie's Viktor Shvets believes the end result will likely be a return to the framework of the 2015 Iran nuclear agreement (JCPOA)—Iran limits its nuclear program in exchange for the lifting of energy export restrictions. He says, "It's not a victory for either side, but right now there seems to be no other even remotely rational option."

AI Capital Expenditure Boom Supports U.S. Stocks Against Energy Shock

Despite ongoing increases in geopolitical risk, U.S. stocks remain near historic highs. John Authers attributes this resilience to the profit boost brought by the surge in AI capital expenditure.

Among the U.S. stock market "tech seven giants," except for NVIDIA which has yet to release its financial report, the other companies have all posted strong quarterly results. Andrew Lapthorne of Société Générale points out that if not for the real threat of war with Iran and supply chain disruptions, investors could fully celebrate the booming corporate profits.

However, this capital expenditure boom does come at a cost. Lapthorne's data shows stock buyback volume has dropped to about 4% per year, and both dividend yield and buyback yield have fallen to lows only seen at the peak of the internet bubble—at a time when companies' distributable cash was far less than now.

Meanwhile, the equity risk premium has turned negative. Calculated as S&P 500 earnings yield minus the 10-year U.S. Treasury yield, investors are actually "penalized" 88 basis points for taking on extra equity risk. Authers believes this indicator reflects extreme market enthusiasm for stocks, leaving nearly no margin for error.

BCA Research's Peter Berezin points out a potential risk: The real threat from AI investment is not that AI turns out to be a bubble, but that the economy successfully transitions to an AI-driven model and no longer needs continued massive capital spending. He compares it to the internet—data transmission keeps growing, but capital expenditure has long stabilized. Wall Street predicts that the free cash flow of hyperscale cloud computing providers will decline by over 70% from its peak by the end of 2026.

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