Strong Earnings Offset Concerns Over an ‘Economic D-Day’ for Iran

The S&P 500 finished modestly higher last week, as strong corporate earnings offset earlier geopolitical tensions.

Markets opened on a sour note on Monday after Treasury Secretary Scott Bessent unveiled “Operation Economic Outcast.” This initiative was to include sweeping sanctions against Iran and the networks that enable the regime to evade existing restrictions. Bessent did not explicitly mention Iran’s enablers, but many assumed China was the primary culprit. The world’s second-largest economy buys 90 per cent of Iran’s oil exports. A renewed trade war with China would have repercussions, however. It would incentivize China to tighten rare-earth metal export controls and complicate President Xi Jinping’s scheduled visit to the US next month.

Equity markets went “risk-off” on Monday, on fears that Middle East tensions were far from resolved. The Technology sector (ticker: XLK) fell 1.8 per cent, driven by Semiconductors (ticker: SOXX). Nvidia (ticker: NVDA) declined Monday for a seventh straight session. Money rotated into Consumer Staples (ticker: XLP), a sector that investors often favor when facing uncertainty. Adding to the defensive mood, Washington and Ottawa appeared to be drifting toward a full-blown trade dispute after Canada failed to compromise in last week’s talks.

Cautious sentiment reversed course after Wednesday’s close. Salesforce (ticker: CRM) delivered one of its strongest quarters in years, with net income climbing 87 per cent and management raising full-year guidance. The results from Salesforce, which provides customer relationship management software, indicated that AI disruption threats may be overdone. Salesforce CEO Marc Benioff called the SaaS-Pocalypse, “nonsense,” as customers are spending more on Salesforce’s AI-assisted software. Furthermore, Anthropic CEO Dario Amodei joined Benioff on the earnings call to underscore an expanded partnership between the two companies. Anthropic is the AI lab behind the Claude chatbot. CRM ended the week up 22 per cent, erasing most of the stock’s prior year-to-date losses.

Nvidia followed with its own blowout report the same evening. Management guided to 70 per cent revenue growth for fiscal year 2028, well above the 45 per cent analysts had penciled in. The initial market reaction was skepticism. Investors have grown wary of Nvidia’s growing web of investments in the AI companies that, in turn, buy Nvidia’s GPU chips. This vendor-financing dynamic echoes the arrangements seen before the dot-com bust. Those concerns faded by Thursday’s close, however, and NVDA surged 8.7 per cent. That move, combined with CRM’s jump, lifted the Information Technology sector 3.2 per cent and made it the only S&P 500 sector to finish Thursday in positive territory.

That backdrop set the stage for Friday, when Fed Chair Kevin Warsh delivered his first speech at the Jackson Hole Summit. Warsh cautioned that current financial conditions look far from restrictive and that recent improvement in price data has been insufficient to convince him the underlying trend is cooling. The yield on the two-year Treasury increased 9bps to 4.32 per cent during his speech, as markets priced in an increased probability of a higher-for-longer rate environment.

With this week’s release of the Employment Situation on Friday, investors will learn how strong hiring was last month. Given that Warsh signaled the inflation half of the Fed’s mandate is not settled, next week’s jobs data could help decide which side of the Fed’s balancing act drives markets into September.