There is a quiet anxiety running beneath the surface of American financial markets right now, one that the cheerful headlines about falling oil prices have done little to dispel. While consumers welcome relief at the pump and equity traders celebrate a broadening rally, economists at Oxford Economics are sounding a more cautious note: the fragile memorandum of understanding between the United States and Iran — a deal meant to end hostilities and reopen the Strait of Hormuz — remains, in the words of chief global economist Ryan Sweet, the single largest risk factor markets face in the second half of 2025.
The arithmetic of the deal’s immediate impact is genuinely striking. Since the US and Iran signed the MOU, international benchmark Brent crude futures have plunged more than 20%, settling near $72 per barrel, while US WTI crude has fallen below $69. Those numbers have injected real momentum into equity markets, rewarding investors who had grown accustomed to volatility and uncertainty. But momentum, as any serious analyst will tell you, is not the same thing as stability — and stability is precisely what this agreement has yet to prove it can deliver.
Sweet’s argument is not alarmist. It is structural. A peace deal that holds, he wrote to clients this week, would produce what he called “a cascade of easing conditions”: energy disinflation pulling inflation figures down, expanded optionality for central banks weighing rate decisions, looser financial market conditions across the board, and meaningful relief for emerging-market economies that have been squeezed by elevated energy costs and a strong dollar. That is a genuinely progressive economic scenario — one where the benefits of lower energy prices flow outward rather than pooling at the top of the income distribution. But Sweet was equally direct about the alternative. “An agreement without a follow-on peace deal,” he warned, “would be volatile and impossible to sustain.”
The risks that Oxford Economics has identified for the second half of the year are deeply interconnected, and the Middle East sits at their center. Trade policy uncertainty persists, with new Section 301 tariffs looking increasingly probable. The artificial intelligence supply chain remains exposed to geopolitical disruption, particularly for the import-heavy Asian economies that manufacture many of the world’s critical AI components. The Federal Reserve faces a delicate balancing act, and China’s stimulus trajectory remains unclear. US midterm elections loom. Every one of these variables, Sweet’s team argues, is influenced — sometimes decisively — by what happens in the Persian Gulf. If the deal collapses and energy prices spike, the Fed faces renewed pressure toward rate hikes at precisely the moment when the global economy can least afford them. Margins at leading AI component suppliers would compress. Emerging markets would suffer. The cascade would run in reverse.
There are genuine reasons for optimism, and intellectual honesty demands acknowledging them. Traffic through the Strait of Hormuz has increased steadily since the MOU was signed, with intelligence firm Kpler recording 108 successful transits — inbound and outbound combined — over the Fourth of July weekend alone. The AI investment cycle is also running stronger than many forecasters anticipated, and infrastructure spending on data centers, utilities, and major international events like the Olympics could deliver economic returns that exceed current projections. Sweet acknowledged all of this. He is not a pessimist by disposition. But he is a realist, and the reality is that post-signing conversations have already been derailed once — by continued fighting in Lebanon, Iranian strikes on vessels navigating the Strait, and a renewed round of US airstrikes that undermined the diplomatic momentum almost before it had begun.
What makes this moment genuinely sobering is the candor with which Sweet summarizes the uncertainty. “Our subjective odds that a durable deal is reached are a coinflip,” he wrote. That is not the language of a confident forecast. It is the language of a world in which the most consequential variable for global markets in the months ahead is a diplomatic agreement between two governments with a long history of mutual hostility, brokered under conditions that neither side has fully committed to honoring. Markets have priced in a degree of optimism. Whether that optimism is warranted depends almost entirely on whether diplomacy can hold where bombs and sanctions have so often failed. The stakes, for ordinary people who pay energy bills and depend on a functioning global economy, could hardly be higher.