Fighting Flares Up Again in Iran, Warsh Turns Hawkish, Treasury Yields Climb

U.S. forces over the weekend apparently attacked two Iranian rocket launchers deployed to Larak Island in the Strait of Hormuz that were preparing to fire mines into that passage when they were struck. This came just days after Centcom (U.S. Central Command) had reported clearing the strait of Iran’s anti-ship mining operations. This was also the first military strike of any kind by U.S. forces against Iranian forces since July 29. This came just days after U.S. Pres. Donald Trump had warned Iran over social media that “There is a Zero Tolerance policy on mine placement in full force and effect.”

Larak Island is a small dot of land in the Strait of Hormuz that had become a strategic point for controlling shipping through that passage for Tehran. The island is used by Iran’s Revolutionary Guard to monitor maritime traffic and overlooks the waterway. The Revolutionary Guard announced that the U.S. attack on Larak Island had killed and wounded several servicemen as well as civilians, according to Iranian state media. The attack made by U.S. forces appeared to be small in scope and more focused than what had been seen earlier this summer.

It is important to note that Iranian attacks on civilian vessels in the Strait had dwindled in recent weeks. Though traffic through that region had not returned to normal levels, it had rebounded sharply in late August. Iranian forces responded by firing eight rockets at U.S. forces stationed in Jordan. All eight were intercepted by either U.S. or Jordanian forces. This renewal of hostilities, though apparently small in scale and hopefully isolated, has put a bid under front month prices for crude oil this morning. Brent has traded above $91 per barrel while WTI has traded above $86 per barrel.

Venezuela Deal

This came days after U.S. Pres. Donald Trump announced an agreement negotiated by Sec. of State Marco Rubio, Defense/War Sec. Pete Hegseth and Venezuela’s acting Pres. Delcy Rodriguez. The deal, which comes after the U.S. military operation back in January that captured former Venezuelan Pres. Nicolas Maduro and his wife Cilia Flores, grants the U.S. a 55% share in a joint operation partnering with an unnamed Venezuelan business to develop 65 billion of proven oil reserves involving at least 17 different fields.

This would make the joint venture the second largest private oil company in the world by reserves and according to Pres. Trump, more than doubles U.S. oil reserves “at no cost to U.S. taxpayers.” Venezuela has granted this joint venture 100-year rights to develop these fields and rights to the U.S. to buy the oil at cost. The U.S. president said as the deal was struck that it will “substantially lower gas prices for all Americans.”

While that may be true over time, this is not something that will have Americans sighing in relief any time soon. This is something that is probably more of a long-term, strategic move than something that would drive prices lower this year or next. This deal ultimately would or at least could replace imports from “less than friendly” governments with output from an asset that will remain under U.S. control for a century.

Certainly, this is a long-term positive. That said, from what I read over the weekend, much of the acreage is what they call “greenfield land” (undeveloped) that will likely take up to ten years to bring into production. Even the land that had been developed, under Maduro, had been allowed to fall into serious disrepair and would require heavy investment before producing in quantity.

Warsh Gets … Hawkish

Friday was also the day that Fed Chair Kevin Warsh made a very serious address from Jackson Hole, Wyoming where he came off as quite hawkish. Warsh was clear: His Fed will focus on the fight against inflation at least for now. He does not see the economy as weakening, freeing his office to place emphasis on tackling one half of the central bank’s dual mandate
versus the other.

The Fed’s 2% inflation target, after almost six years of persistently rising prices, a condition that had been created in the first place by expanding the money supply far more aggressively than necessary (and for far too long after the pandemic had ended) during the response to the pandemic, remains the target.

This sobering speech had a negative impact on financial markets, forcing Treasury yields sharply higher, and equities lower. Tech stocks and small to mid-cap stocks were hit particularly hard as this signaled hawkish shift in policy will hurt business heavily reliant upon debt and the use to their balance sheets to maintain operations.

The Week That Was…

Last week did end very well for stocks. The week ended on that sour note, despite what had been blowout earnings reported by AI king Nvidia (NVDA) midweek. This is how last week went at the index level:

The S&P 500 lost 0.25% on Friday but gained 0.49% for the week.
The Nasdaq Composite lost 0.52% on Friday but gained 0.85% for the week.
The Nasdaq 100 surrendered 0.7% on Friday but added 0.43% for the week.
The Russell 2000 gave back 1.39% on Friday and 1.51% on the week.
The S&P Small Cap 600 moved 0.84% lower on Friday, and 1.22% lower for the week.
The S&P Midcap 400 gave up 1.2% on Friday and 1.33% for the week.
The Dow Transports backed up 0.29% on Friday and 0.89% for the week.
The Philly Semis were hit for 3.47% on Friday, flipping the week to a 2.31% loss.
The KBW Bank Index added 0.28% on Friday, and 0.65% for the week.

On Friday, five of the 11 S&P sector SPDR ETFs closed out the session in the green, led by communication services (XLC) and the discretionaries (XLY). Technology (XLK) was the obvious loser.

For the week, just three of the 11 S&P sector SPDR ETFs finished the five-day period in the green. Communication and technology led, while health care (XLV) and the industrials (XLI) went the wrong way. There was no clear visible leadership evident for the week in the ongoing battle between cyclical and defensive sectors.

Week Ahead

As we race ahead into the oncoming week…

The Geopolitical: The threat from this arena never ends. If it’s not public worries that Russia will try something militarily against its smaller NATO-allied neighbors that used to be members of the USSR, it’s a trade war between the US and its northern neighbor. If it’s not a trade war between the US and Canada, it’s a reflaring of hostilities between the US and Iran that threatened the recovery of maritime traffic through that region.
Macro: It’s “August “jobs week” my friends, and after the putrid results and revisions suffered by U.S. labor markets for the month of July, nothing could be more in focus this week. Tack on the Fed Chair’s stated intention to focus on the fight against inflation and it becomes quite apparent that he needs labor markets to stabilize in order to implement plans to tighten monetary policy.
The Federal Reserve: The Fed will be rather quiet this week, coming off of its economic symposium in Jackson Hole. It is also very likely that the new Fed Chair has instructed his minions to be less open with their public words spoken, at least for now. That said, Fed Govs. Michael Barr and Christopher Waller will speak on Tuesday and Thursday respectively. Cleveland Fed Pres and perma-hawk Beth Hammack will speak as well on Thursday afternoon. In addition, the Fed will release its latest edition of the Beige Book this Wednesday afternoon.
Earnings: Though the second quarter earnings season has largely ended, we do still have a few stragglers coming in. This Tuesday afternoon, Dell Technology (DELL) will report along with MongoDB (MDB) and Palo Alto Networks (PANW). On Wednesday evening, Broadcom (AVGO) and Snowflake (SNOW) will go to the tape, followed by Campbell’s Soup (CPB) on Thursday morning. That afternoon, we’ll hear from Docusign (DOCU), Lululemon Athletica (LULU) and Zscaler (ZS).
Corporate Events: Cybersecurity will be in focus this week. Not only will Palo Alto and Zscaler report, but CrowdStrike (CRWD) , which posted an excellent quarterly beat and raise last week, will hold that firm’s annual Fal.Con conference in Las Vegas over the coming days. The show starts later today. CrowdStrike CEO George Kurtz will deliver his keynote address on Tuesday morning. Other high-profile speakers include Nvidia’s Jensen Huang and Intel’s (INTC) Lip-Bu-Tan.

Earnings

As of Aug. 28, for the second quarter, Wall Street now sees blended (results and expectations) at an incredible year-over-year earnings growth rate for the S&P 500 of 52%, up from 50.4% three weeks ago, according to FactSet. Wall Street also sees revenue growth of 15.5%, up from 15% over that same time frame. With 97% of S&P 500 companies having already reported for the season, 86% have beaten earnings expectations, while 77% have beaten revenue expectations.

For the full year of 2026, the Wall Street now looks for earnings growth of 31.2%, up from 30% earlier this month, and up from 14.7% as the season began. This would come on revenue growth of 11.9%, up from 11.5% three weeks ago and up from 7.7% two months ago. The outlook for the third quarter is also very positive. Third quarter S&P 500 earnings growth is now estimated at 28.2% year over year, up from 27.4% earlier in August.

At the moment, the energy, communication services, consumer discretionaries and technology sectors are projected to have or have grown Q2 earnings by an absolutely jaw-dropping 146.3%, 116.9%, 92.4% and 75.3% respectively. Just one sector, health care (at -6.5%) is currently projected to have suffered a Q2 earnings contraction.

Valuation

Still using data provided by FactSet, the S&P 500 ended last week trading at 19.6-times 12 months’ forward-looking earnings, down from 20-times earlier this month and down from 21.6-times roughly two months ago. This is back below the five-year average of 19.9-times for the index, but still well above its ten-year average of 19 times.

The S&P 500 also ended last week trading at 26.4 times trailing twelve months’ earnings, down sharply from 28.2 times three weeks ago. This still stands well above the five-year (24.4 times) and ten-year (23.5 times) averages for the index.

Currently, four of the 11 sectors are trading below their five-year average valuations. Seven sectors, led by the Industrials (24.1 times) are trading at a premium to their five-year average valuation. The four “undervalued” sectors according to their historical averages over five years are the discretionaries, technology, the utilities and communication services.

Fed Funds Futures

Fed Funds futures trading in Chicago are now pricing in a 62% probability for a quarter-percentage point rate hike to be made to the current target range (3.5% to 3.75) for the Fed Funds Rate at the culmination of the next Federal Open Market Committee policy meeting on Sept. 16. That’s up sharply from a 40% likelihood a week ago at this time. There is now a 57% likelihood priced in for a second quarter point rate hike as soon as Jan. 27. There are no rate cuts fully priced in at any point in the future looking out toward year’s end 2027, though there is now a minority probability being priced in as early as October of 2027. There is also no third quarter point rate hike priced in at any point in the future.

Economics (All Times Eastern)

10:30 – Dallas Fed Manufacturing Index (Aug): Expecting 0.7, Last 1.3.

The Fed (All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: SAIC (2.31)

At the time of publication, Guilfoyle was long NVDA, CRWD, INTC equity.