Prediction: Wall Street's Historic Iran War Rally Is About to Receive a Much-Needed Dose of Reality

Investors were privy to a bit of Wall Street history last week. Friday, April 17, marked record-closing highs for the benchmark S&P 500 (SNPINDEX: ^GSPC) and growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC). It also featured a first-of-the-century move for the Nasdaq, with the tech-heavy index closing higher for a 13th consecutive trading session.

The bigger story has been the complete about-face in Wall Street's major stock indexes since March 29. Both the Dow Jones Industrial Average (DJINDICES: ^DJI) and the Nasdaq Composite have reversed corrections, while the S&P 500 erased its steep pullback.

The catalyst behind these historic moves is positive news on the geopolitical front -- specifically, the Iran war.

President Trump delivering remarks. Image source: Official White House Photo by Daniel Torok.

Wall Street's Iran war bounce-back rally has been epic

On Feb. 28, at President Donald Trump's command, U.S. military forces, along with Israel, commenced attacks against Iran. Not long after these military operations began, Iran shut down the Strait of Hormuz to virtually all commercial shipping traffic.

The Strait of Hormuz sees approximately 20 million barrels of petroleum liquids (20% of global demand) pass through it daily. In other words, Trump's actions led to the largest energy supply disruption in modern history.

On April 8, the U.S. and Iran brokered a ceasefire, raising investors' hopes that this conflict would ultimately prove short-lived. By April 17, Iran announced that it had fully reopened the Strait of Hormuz to commercial vessels, sending West Texas Intermediate (WTI) crude oil futures tumbling nearly 11% to their lowest close since March 10.

The Strait of Hormuz is COMPLETELY OPEN AND READY FOR BUSINESS! pic.twitter.com/bnNcLMnI6g

-- The White House (@WhiteHouse) April 17, 2026

As of this writing in the early morning hours of April 18, the Associated Press notes that the U.S. still has a blockade in place on Iranian ships in the Strait of Hormuz that it intends to remove only when Iran reaches a deal with America regarding its nuclear program.

Despite every step forward coming with a degree of uncertainty, investors are clearly excited about the prospect of global oil shipments potentially normalizing. As the supply of petroleum liquids returns to normal, upward price pressures should ebb. On paper, this is seemingly good news for consumer spending.

Unfortunately, this utopian rally for stocks completely overlooks a headwind that's still fully capable of pulling the rug out from beneath investors.

Image source: Getty Images.

The stock market is about to receive a needed dose of reality

On the surface, the potential end of military conflict in Iran and a reopening of the Strait of Hormuz is good news. However, this doesn't mean the greatest threat to a historically expensive stock market instantly disappears. I'm talking about inflation.

Between the time this conflict began and April 7 (the day before the ceasefire was announced), WTI crude oil prices surged by 69% per barrel to nearly $113. The national average price of a gallon of regular gas soared at its fastest pace in 30 years. It was a similar story with diesel fuel, which rose by an even higher percentage than gas.

Average U.S. gas prices per gallon on April 7, per AAA:

• Regular: $4.14 (⬆️ $1.16 since war in Iran began on Feb. 28)

• Premium: $5.02 (⬆️ $1.16 since war began)

• Diesel: $5.65 (⬆️ $1.89 since war began)

-- NBC News (@NBCNews) April 7, 2026

In addition to fuel prices pinching consumers at the pump, a rapid increase in crude oil prices often translates to higher transportation and/or production costs for businesses. It's a problem for most sectors and industries.

Although WTI crude ended April 17 at a five-week low following clear signs of geopolitical progress in the Middle East, energy price cycles aren't proportionate. This is to say that gas prices soar like a rocket when energy price shocks occur, and they typically fall like a feather (i.e., decline very slowly) after a shock event has passed.

Even if we assume the best-case scenario -- the Iran war conflict has ended, Iran meets the United States' nuclear deal terms, and the Strait of Hormuz is completely reopened to all commercial vessels -- the inflationary pressures affecting the U.S. aren't going away anytime soon.

According to the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool, which updates Monday through Friday following the release of key economic data, trailing 12-month (TTM) inflation for April is forecast to climb by 28 basis points to 3.58%. To put this into perspective, the TTM inflation rate reported by the U.S. Bureau of Labor Statistics for February was just 2.4%.

When 2026 began, the stock market was sporting its second-priciest valuation in the last 155 years, according to the S&P 500's Shiller Price-to-Earnings Ratio. While supercharged growth tied to the artificial intelligence revolution partially spurred premium valuations, it was the expectation that the Federal Reserve would cut interest rates several times this year that really powered an already expensive stock market higher.

S&P 500 Shiller PE Ratio hits 2nd highest level in history 🚨 The highest was the Dot Com Bubble 🤯 pic.twitter.com/Lx634H7xKa

-- Barchart (@Barchart) December 28, 2025

However, the U.S. inflation rate has spent the last five years above the central bank's long-term target of 2%. With TTM inflation projected to jump by 118 basis points over two months to 3.58% in April, the Federal Open Market Committee (FOMC) -- the 12-person body responsible for setting the nation's monetary policy -- has no incentive to pursue its ongoing rate-easing cycle.

In fact, the Federal Reserve Bank of Atlanta's Market Probability Tracker places a higher probability on the FOMC hiking interest rates than cutting them by June 17 (12.84% probability of a hike vs. 4.11% probability of a cut).

To add fuel to the fire, President Trump's tariffs have remained sticky in the goods sector. Even if WTI crude prices continue to fall, the U.S. inflation rate isn't going to meaningfully decline anytime soon.

With FOMC rate cuts seemingly off the table, Wall Street's historically pricey stock market has nowhere to hide -- especially after its breakneck, three-week rally.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.