The financial markets are facing a period of heightened uncertainty driven by a recent U.S. Supreme Court (SCOTUS) ruling and escalating geopolitical tensions. The trigger was a SCOTUS decision that declared existing U.S. import tariffs illegal. In response, the Trump administration promptly activated a base tariff under Section 122 of the Trade Act of 1974, a move valid for only 150 days without congressional approval.
While politically expedient, this replacement tariff was not well-received by financial markets, which had grown accustomed to the previous, now-illegal, tariffs. Those tariffs had helped reduce the trade deficit, dampen debt increases, and limit the supply of U.S. Treasuries—a convenient arrangement for investors. The initial market reaction to the ruling was surprisingly calm last Friday, as participants anticipated a more sophisticated governmental response over the weekend. When that response failed to materialize, the calm evaporated.
Beneath the surface of a seemingly strong U.S. stock market, structural weaknesses have been simmering. For years, there has been an increased willingness to take short positions in S&P 500 futures, a trend that has recently intensified. Although often used for hedging, this activity signals growing investor unease. Analysis of After Open Action (AoA) reveals that traders have been quietly but steadily reducing positions since the fall, with the Nasdaq Index showing particular weakness.
The correction has already impacted major sectors. The "Magnificent Seven" tech stocks and software companies have been hit hard, with a proprietary index of U.S. software stocks losing over 30% since the end of 2025. Despite a stable appearance, the broad S&P 500 has significantly underperformed the global stock index since November 2025, losing its role as a market locomotive. Market sentiment, which was neutral at best since year-end, is now "noticeably clouding over."
Compounding the economic uncertainty is a significant geopolitical risk centered on Iran. Despite a U.S. military build-up in the region and Iran's backing from Russia and China—including access to advanced supersonic missiles—the oil market has not yet priced in a substantial political risk premium. This is surprising given that approximately 20% of global oil production and a significant portion of the global LNG market transit through the Strait of Hormuz, a chokepoint for exports from Kuwait, Saudi Arabia, Iraq, the UAE, and China's oil imports from Iran. A military escalation could effectively close this vital passage.
While precious metals have reacted with higher prices, equity and oil markets remain oddly calm. The combination of regulatory uncertainty from the tariff ruling and the looming threat of a supply shock in the Strait of Hormuz creates a scenario where "the roof and beams are creaking quite loudly" for risk assets.
