A ceasefire lifts stocks, but inflation expectations and bond yields will decide if calm holds

The S&P 500 Index is rallying off recent lows, reflecting a sudden lift in investor sentiment after the US and Iran announced a two-week ceasefire on April 7, 2026. Iran has agreed to allow safe passage of energy shipments through the Strait of Hormuz, reducing immediate geopolitical risk in a critical global chokepoint. Markets are reacting as if the worst may be over — for now. But the durability of this relief hinges not on headlines, but on bond yields and inflation expectations. The 10-year Treasury yield has pulled back from its recent runup, a sign that safe-haven demand is easing. Yet the 2-year yield has risen above the median Fed funds rate, signaling that bond markets are pricing in a modest rate hike. That divergence underscores the Federal Reserve’s dilemma. Median inflation expectations have climbed to 3.4% for the year-ahead, according to the New York Fed’s survey — a level that risks entrenching reflationary sentiment. The concern is not just that energy prices spiked during the conflict, but that repairs to damaged infrastructure in the Middle East will take months or years, delaying any meaningful relief for headline inflation. The Atlanta Fed’s GDPNow model reflects this drag: its latest nowcast for Q1 2026 GDP growth stands at 1.3%, down from earlier estimates and only a marginal improvement over Q4’s 0.7% gain. The war’s economic fallout remains a headwind heading into Q2. While the ceasefire allows the repair of both physical infrastructure and market confidence to begin, the process will be measured. As Zhuwei Wang of S&P Global Energy notes, trade flow normalization will take months, not weeks. The immediate test for financial stability isn’t the next diplomatic statement — it’s whether inflation expectations recede and Treasury yields remain range-bound. If they don’t, the stock market’s relief rally will have a ceiling.