Editor-in-Chief Atul Singh and FOI Senior Partner Glenn Carle, a retired CIA officer who now advises companies, governments and organizations on geopolitical risk, examine a global economy under mounting strain. Inflation is accelerating after the US/Israel–Iran war triggered a supply shock through the Strait of Hormuz, government bond markets are flashing warning signs across multiple advanced economies and Wall Street continues to rally despite growing concerns about valuation and financial excess. Both analysts examine how geopolitical shocks, fiscal imbalances and market behavior are affecting both advanced and developing economies.

Inflation returns as the Hormuz crisis reverberates

Global headline inflation is projected to reach roughly 4.4%–5.2% in developing economies and around 2.9% in developed ones. The US has already seen inflation accelerate sharply. Annual inflation rose from 2.4% at the beginning of 2026 to 3.8% in April, the highest level in three years. Fuel oil prices increased by 5.8% in April compared to March.

The immediate trigger is clear. The US/Israel–Iran war and the resulting closure of the Strait of Hormuz have created a major supply shock. Over 20% of oil and gas, about 33% of fertilizers and numerous other commodities pass through the strait. Thanks to the war, energy prices have risen, transportation costs have increased and real wages have decreased across much of the developed world.

The shock is arriving on top of longer-term structural weaknesses. Years of persistent fiscal deficits and mounting debt have left governments vulnerable. Simultaneously, concerns have emerged over the Trump administration’s political interference with the Federal Reserve. This combination of geopolitical disruption, fiscal imbalance and political interference with the central bank threatens the global economy.

Bond markets flash a warning

One of the most dramatic developments of the month has been the simultaneous repricing of long-term government bonds of many countries. The yield on the 30-year US Treasury bond has climbed above 5%, its highest level since 2007. In the UK, the yield on the 30-year gilt reached 5.81%, the highest since 1998, while the benchmark ten-year gilt rose to 5.13%, the highest since 2008. Long-term sovereign yields in Germany, Japan and France have also moved sharply higher, with yields ranging from roughly 3.5% to 6%.

This is not an isolated national event. Four countries, four political systems and four central banks are experiencing similar pressures. As one analyst summarized, the developed world has “too much debt, too little fiscal discipline, and no political appetite for fixing either.”

Rising yields matter because governments must pay more to service their debts. As borrowing costs increase, less money remains available for public services, infrastructure, defense or social spending.

In the case of the US, the Trump administration has exacerbated longstanding structural problems. Federal debt has surpassed $39 trillion, with the latest trillion dollars accumulating at a record pace. Tax reductions have reduced revenues while spending has continued to rise, particularly because of the costs of the war with Iran.

The US is weakening several of the foundations that supported decades of economic growth. Trade restrictions and tariffs have made the economy less efficient, cuts to federal research and development spending lower innovation, and attacks on institutions that historically underpinned American economic strength damage long-term growth prospects.

Structural pressures on households

In addition to the government, household budgets are also facing immense pressures. One of the reasons is restricted immigration. Recent studies estimate that immigrants have contributed a net $15 trillion to the US economy since 2010. Workers who have harvested crops that have given Americans low-cost food have vanished. As a result, food costs have increased. Fertilizers now cost more because of the closure of the Strait of Hormuz. The inflationary pressures of the war are increasing interest rates, pushing up mortgages. They are also pushing up fuel costs, although not as much as in Europe or Asia. Food, housing and transportation costs, the three most important expense items for households, are now causing pain to millions of American families.

Many households increasingly rely on debt to make ends meet. Consumption accounts for 67% of the US GDP. This is bound to suffer as pressures on households rise, making an economic downturn imminent.

Yet Wall Street surges

Despite the many woes in the economy, equity markets continue to rally. The top five mega-cap technology companies now represent roughly 30% of the entire S&P 500 and the Magnificent Seven account for approximately 35%. This is the highest degree of market concentration seen in half a century. NVIDIA alone has surpassed a $5 trillion valuation, making it worth more than the GDP of most countries.

The AI investment boom continues to accelerate. Microsoft, Alphabet, Amazon and Meta are expected to spend between $660 billion and $700 billion on AI infrastructure and data centers in 2026 alone. Between 2026 and 2029, cumulative AI infrastructure spending is projected to exceed $1.1 trillion.

Atul points to valuation metrics that increasingly concern investors. The Shiller price-to-earnings ratio, which adjusts earnings over ten years and accounts for inflation, has risen above 40 for the first time since the dot-com crash. The ratio currently sits near 42:1, a level that has historically preceded major market corrections.

Yet generative AI applications are generating only about $12–15 billion in direct consumer and enterprise software revenue annually. Critics are rightly questioning whether revenue growth can justify the scale of investment currently taking place and the sky-high market valuations.

Supporters of the boom point to several counterarguments. S&P 500 operating margins remain near historic highs of approximately 16%. Technology companies are financing investments largely from enormous cash flows rather than speculative borrowing. Many firms also expect AI to generate significant cost savings by automating workflows across sectors ranging from manufacturing to healthcare.

Glenn adds another important qualification. Outside the Magnificent Seven, valuations appear considerably less stretched. The remaining 493 companies in the S&P 500 trade at a price-to-earnings ratio of roughly 22 and have delivered returns of about 8% over the past five years. He considers these figures healthy rather than speculative.

Even so, notable investors remain cautious. Berkshire Hathaway chief executive Greg Abel is currently overseeing a cash position of roughly $400 billion accumulated under former legendary CEO Warren Buffett. Abel has stated that he is “not anxious to deploy capital into subpar opportunities.” Other older investors expect a 10–15% market correction soon.

A widening gap between financial markets and economic reality

Another warning sign comes from the relationship between stocks and bonds. The Wall Street Journal recently observed that the “Risk Premium for Holding Stocks Over Bonds Vanishes.”

The equity risk premium is the additional return investors expect from stocks compared with risk-free government securities. Historically, stocks offered substantially higher expected returns than Treasury bonds. Today, that gap has narrowed dramatically.

Atul argues that this points to a broader disconnect. Bond markets are signaling caution while equity markets are soaring. Financial prices increasingly diverge from conditions in the real economy. Such discrepancies are clearly visible in commodity markets, where physical delivery prices for oil in Asia often exceed benchmark prices displayed on financial screens.

Not only bond market bears but also European policymakers are worried about the economy. The European Central Bank (ECB) has warned about the AI investment boom financed by private credit. Insurers and pension funds could be in trouble when private credit markets suffer a shock. These markets suffer from opacity and liquidity mismatches. This euro area’s financial system could be in trouble.

Developing countries are already in trouble. Many emerging economies are struggling with Iran’s closure of the Strait of Hormuz. Indian Prime Minister Narendra Modi has urged citizens to conserve fuel, hold more meetings online, reduce travel and avoid purchasing gold abroad. Indonesia has proposed centralizing exports of commodities such as palm oil and coal through a state-operated export company, while requiring export earnings to be deposited in state-owned banks. The Indonesian central bank has also raised interest rates by half a percentage point, the first increase in two years. At least four people were killed in protests over high fuel prices in Kenya. In response, the government cut diesel prices and entered negotiations with transport unions to resolve a strike by bus and minibus drivers. The war has driven up prices in Kenya, which, like much of East Africa, depends on the Persian Gulf for energy supplies.

Exacerbating the current crisis is the highly unequal distribution of economic gains. Only about one-third of Americans own stocks, while wealth is more concentrated than at any point since the robber baron era of the late 19th century. Asset owners continue to benefit from rising markets, but many middle-class households are covering rising living costs through more debt, not higher incomes.

That divergence between financial markets and everyday economic reality represents one of the greatest dangers facing the global economy. The immediate shock may have come from the Strait of Hormuz, but the deeper vulnerabilities have been accumulating for years and are becoming increasingly difficult to ignore. A severe global crisis is increasingly nigh.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.