The Great Divergence
The Week Ahead - May 4, 2026
The divergence between market prices and the high-frequency economic data is becoming more pronounced, as the major market indexes continue to record new all-time highs. Meanwhile, rates of change are deteriorating, as inflation and interest rates rise, while business activity outside of AI slows. Investors are looking past these headwinds as temporary and largely irrelevant, but each day that the Strait of Hormuz remains effectively closed increases the probability that what is assumed to be temporary will have a longer lasting adverse impact on our economy and markets. Regardless, stocks advanced for a fifth week, posting their best month of gains since 2020 and their longest weekly advance since 2024 on expectations that a deal between the Trump administration and Iran will be struck sooner than later.
Recent headlines argue otherwise. Iran’s latest proposal calls for a complete end to the conflict within 30 days along with sanctions lifted, reparations paid, an end to the blockade, the withdrawal of US forces, and guarantees against renewed strikes, including Israel’s ongoing invasion of Lebanon. There is no mention of nuclear material. Again, this is a nonstarter for President Trump, which leaves him with two options. Either renew the strikes, which may require Congressional approval, or maintain the blockade and honor the ceasefire in hopes that economic pressure will force Iran to come to his terms. Neither is likely to end the conflict anytime soon.
