Inflation, Hormuz, and the Ghost of 1973

Why an oil shock, an AI build-out, and the second-highest stock valuations in history demand we revisit a chapter many investors would rather forget

May 21, 2026

Inflation has reaccelerated. The Bureau of Labor Statistics' April release showed the all-items CPI rising 0.6% on the month and 3.8% on the year --- the hottest annual print in three years (Figure 1).¹ Energy alone jumped 3.8% on the month and accounted for more than forty percent of the headline increase, while core inflation reaccelerated to 2.8% year-over-year.¹ The bond market has noticed. The 10-year Treasury yield has pushed to roughly 4.7%, a sixteen-month high, and the 30-year is at an eighteen-year high near 5.2%.²

Behind those numbers sit two forces I want to spend this letter on. The first is the ongoing disruption at the Strait of Hormuz, which has functioned as a closure for most commercial traffic since early March.³ The second is the staggering scale of artificial intelligence capital spending, which is consuming electricity, capital, and labor at a rate the U.S. economy has not seen in any prior infrastructure cycle.⁴ Together, they raise a question I think every long-term investor needs to take seriously: are we re-running the 1970s --- and if so, what does that mean for stock prices from levels that, by one widely watched measure, have only been seen once before in 144 years of market history?⁵

I want to walk through what I see, where it rhymes with the 1970s and where it does not, and then turn to the question that matters most: what continued or rising inflation could do to equity prices from today's starting valuations.

Figure 1: Headline CPI YoY reaccelerated to 3.8% in April 2026.

For context, the conflict that triggered all of this began on February 28, 2026, when the U.S. and Israel launched an air war against Iran.⁶ Iran's response was to close the Strait of Hormuz on March 4, blocking the chokepoint through which roughly twenty percent of the world's seaborne oil passes.⁶ Brent crude swung from a high of $144 per barrel down to below $100 and then back into the $110 range as traders chased every diplomatic headline.⁷ WTI has traced a similar arc, trading near $99 a barrel as I write this after touching the mid-$100s earlier in May.⁸

On April 17, Iran's foreign minister formally announced the strait was open to all shipping.⁹ A reasonable observer might have expected commercial traffic to resume. It has not. Since May 6, open transits through Hormuz have fallen to near zero vessels per day, with the limited movement that does occur tied largely to Iranian-linked shipping.¹⁰ The U.S. Navy has launched an operation to escort merchant vessels back through the strait, and as of mid-May only two merchant ships had completed the crossing under that protection.¹¹ UBS now expects global oil inventories to approach all-time lows by the end of this month.¹²

The takeaway is simple. Whether or not Iran's foreign ministry says the strait is open, the strait is not functioning. Insurers, charterers, and tanker owners are treating it as closed, and the global oil market is pricing the gap. Forecasters at ING and other shops have already raised oil price assumptions on the view that the disruption is structural rather than headline.¹³ Even if a ceasefire holds and traffic normalizes by late summer, a thinning inventory cushion means oil prices will be more sensitive to every supply hiccup for the next twelve months.

That sensitivity is what worries me. It's not the current oil price that drives a 1970s-style inflation problem. It's what happens to oil prices when the cushion is gone and the next shock arrives.

While the oil story dominates headlines, a quieter but arguably larger inflationary force is running in the background. The four largest hyperscalers --- the cloud and AI infrastructure giants --- are on track to spend roughly $700 billion on capital expenditures this year, up close to seventy-seven percent from 2025 (Figure 2).¹⁴ Broaden the lens to the top nine global cloud providers and the figure rises to roughly $830 billion in 2026, with credible forecasts placing 2027 capex above $1 trillion.¹⁵ One Federal Reserve analysis estimates that AI-related capital expenditures are now running at roughly 3.5 to 5 percent of U.S. GDP, and in the first quarter of this year AI capex accounted for an extraordinary share of total GDP growth.¹⁶

That spending has to land somewhere in the real economy. It lands first in semiconductors, where lead times have lengthened. It lands in construction, where data center build costs are rising. It lands in skilled labor markets, where electricians and grid engineers command premiums. And it lands most visibly in electricity prices. Residential electricity prices rose 7.1% in 2025 --- more than double the headline inflation rate that year --- and the increases have been concentrated in regions building out data center capacity.¹⁷ In the PJM Interconnection, which serves much of the mid-Atlantic, capacity market clearing prices for the 2026-2027 delivery year cleared at $329.17 per megawatt, more than ten times the $28.92 price for the 2024-2025 year, with rapid data center growth identified as a primary driver.¹⁸ The Dallas Fed has estimated that wholesale power prices could rise by as much as fifty percent as data center demand doubles over the next five years.¹⁷

Why does this matter for inflation? Because energy and electricity prices are not just line items in the CPI. They are inputs into nearly every other good and service. Cement, fertilizer, food, freight, water treatment, refrigeration, manufacturing --- all of it depends on power. A persistent grind higher in power prices works through the economy the same way the 1970s oil price increases did, just on a longer fuse. And unlike the oil shock, this one is not going to reverse if Iran stands down. Data center construction commitments are being made now for facilities that will operate for two decades.

The combination is what I want you to think about. An acute supply shock in oil, layered on top of a structural demand shock in electricity, layered on top of a labor market that is still tight. That is not a one-quarter inflation problem.

Figure 2: Combined hyperscaler capex (MSFT, GOOGL, AMZN, META) is projected to roughly double in 2026 and exceed $1T by 2027.

Let's look at the historical parallel honestly, because the differences matter as much as the similarities.

The 1970s inflation episode was triggered by an oil shock --- the 1973 OPEC embargo --- that nearly quadrupled crude prices from $2.90 to $11.65 per barrel.¹⁹ Headline CPI climbed from 6% in 1970 to roughly 12% in late 1974, ebbed for a few years, and then surged again to a peak near 15% in early 1980 after the Iranian Revolution and the start of the Iran-Iraq War.²⁰ Year-over-year inflation averaged 7.4% across the decade, and at the worst points workers' real wages fell despite nominal raises.²¹ It took a recession in 1973-75, another in 1980, and an extremely painful recession in 1981-82 --- with the Fed funds rate above 19% under Paul Volcker --- to finally break the back of expectations.

The parallels today are real. Like the 1970s, we have an acute oil shock driven by Middle East conflict. Like the 1970s, we have a recent fiscal expansion that has left the system flush with money. Like the 1970s, the Federal Reserve is institutionally cautious about appearing too tight, and the market is now pricing roughly even odds that the Fed's next move is a hike rather than a cut.²² The current target range of 3½ to 3¾ percent leaves real rates positive but not punitively so. Layered on top of that, Jerome Powell's term as Chair ended May 15, with Kevin Warsh sworn in as the new Chair after Senate confirmation on May 13 --- a leadership transition arriving at exactly the wrong moment.³¹

But there are differences. Our economy is far less energy-intensive per unit of GDP than the 1970s economy was. Labor markets are unionized at a fraction of the prior rate, which makes a 1970s-style wage-price spiral harder to ignite. And the Fed today has an explicit inflation target and a credibility built up over forty years of disciplined policy. None of that guarantees a better outcome. But it does mean the path is not preordained.

The question is whether the combination of an oil shock and an AI-driven electricity shock can do to today's economy what oil alone did to the 1970s. I think it can. Not necessarily to the same magnitude --- 15% inflation feels unlikely from here --- but persistent inflation in the 4 to 6 percent range for several years is entirely plausible. And as the 1970s taught us, that is more than enough to wreck a stock portfolio.

There is a widely held belief, repeated often in financial media, that stocks protect you from inflation because companies can raise prices. The actual record of the 1970s says otherwise.

Figure 3 shows the year-by-year S&P 500 total returns during the decade against headline CPI. The numbers look mixed --- some good years, some bad years --- but the cumulative reality is unforgiving. From 1973 through 1982, the S&P 500's nominal total return was positive but modest. Adjusted for inflation, the real total return was approximately negative 2% per year, meaning an equity investor lost roughly twenty percent of their purchasing power across that decade despite holding "the market" through the entire stretch.²³ The two worst years were brutal: -14.3% in 1973 and -25.9% in 1974, a peak-to-trough drawdown of roughly forty-eight percent on the broad index.²⁴

Why did stocks fail as an inflation hedge? Three reasons, all of which apply today.

First, valuation multiples compress when inflation rises. A dollar of earnings ten years out is worth less when the discount rate goes up. Higher inflation pushes nominal interest rates higher, and that mechanically reduces the present value of long-duration assets --- which is what growth stocks are.

Second, corporate margins do not actually expand with inflation in any sustained way. They expand briefly during the initial price-pass-through phase and then compress as input costs, wages, and capital costs catch up. Across the 1970s, S&P 500 earnings in real terms barely grew at all.

Third, and most important for today, valuations going into the 1970s were already elevated. The S&P 500 entered 1973 trading at a price-to-earnings ratio of roughly 18.9, and the Nifty Fifty growth darlings of that era traded at an average P/E near 41.9 --- with more than twenty percent of those names trading above 50 times earnings.²⁵ Sound familiar? It should. The Shiller cyclically-adjusted price-earnings ratio --- which smooths earnings over a ten-year window --- was around 24 at the 1966 peak that began the long secular bear market.²⁶ Today, that same ratio sits at approximately 41.6.⁵

If the 1970s started from a CAPE of 24 and produced a decade of negative real returns, what should we expect today from a CAPE that is more than seventy percent higher?

Figure 3: Year-by-year S&P 500 total return vs. CPI YoY through the 1970s — stocks repeatedly trailed inflation.

Figure 4 shows the Shiller CAPE ratio across the past 145 years, with the current reading marked. Only one period in U.S. history has exceeded today's level: the peak of the dot-com bubble in December 1999, when CAPE reached 44.2.²⁷ Today's reading is meaningfully above the September 1929 pre-crash peak of approximately 33, and above every other significant valuation peak --- 1903, 1937, 1966, 2007, and 2021 --- all of which topped out below where we sit right now.²⁹

Said differently: at a CAPE of 41.6, the cyclically-adjusted earnings yield on the S&P 500 is approximately 2.4 percent.⁵ That is the real return the index would deliver over the long run if cyclically-adjusted earnings simply held steady at their current real level. The forward 12-month P/E ratio --- a much friendlier measure that uses analyst estimates --- sits at roughly 22, well above its 10-year average of 18.9 and its 5-year average of 19.9.²⁸ Whichever measure you prefer, today's market is priced for an outcome that ranges from "very good" to "approximately perfect."

Now layer in the historical context. Every prior CAPE reading above 20 has been followed, eventually, by a secular bear market --- meaning a multi-year period in which the index made no real progress on an inflation-adjusted basis.²⁹ Not every such period produced a crash, but every one produced a stretch of disappointing returns long enough to test the patience of even committed long-term investors. By the early 1980s, after a decade of inflation, the Shiller CAPE had fallen to roughly 7.³⁰ That is the kind of valuation reset that gives you the next generational buying opportunity. Today's reading is nearly six times that level.

Here is the analogy I keep coming back to. Imagine buying a beautiful house in a great neighborhood at the absolute top of the market, financed at a low rate. Then interest rates double. The house is still beautiful, the neighborhood is still great, and you still need somewhere to live --- but your wealth has materially changed and you will not see it back for a long time. That is what an inflation-driven valuation reset feels like for an equity portfolio.

Figure 4: Shiller CAPE 1881-2026 — today's reading is the second-highest in 145 years, surpassed only by December 1999.

I want to be honest about what concerns me. Today's equity market is priced on the assumption that inflation returns to the Fed's 2% target relatively quickly, that the Fed begins cutting rates again later this year, and that AI-driven earnings growth justifies a multiple at the very high end of the historical range. If any one of those assumptions slips, the math changes meaningfully.

A simple scenario worth thinking through. Suppose inflation does not retreat to 2% --- suppose instead it settles in the 4 to 5 percent range for the next two to three years, driven by the combination of an unstable Hormuz, structural electricity inflation from AI, and a fiscal posture that still runs trillion-dollar deficits. In that world, the Fed cannot cut rates the way the market expects, and the 10-year Treasury yield does not fall back to 4 percent --- it stays at 5 percent or grinds higher. Now apply that backdrop to a market trading at a Shiller CAPE of 41.6. The natural response is for that multiple to compress, perhaps not all the way to its long-run average of 17, but meaningfully. Even a move from 41 to 25 --- which would still leave equities historically expensive --- implies a roughly forty percent compression in valuation. Earnings would have to grow extraordinarily fast to offset that, and history says that is not what happens when inflation is in the 4 to 5 percent range.

I am not predicting that path. I am pointing out that today's price embeds a perfect outcome, and the conditions for an imperfect outcome are clearly visible.

The lesson of the 1970s is not that stocks are bad investments. They are not. The lesson is that valuation at the start of an inflationary period dictates the experience you have during that period. A diversified investor who bought stocks in the early 1980s at a CAPE near 7 had one of the best decades in market history. A diversified investor who bought stocks in 1972 at a CAPE just under 20 lost real money for a decade.³² We are starting today from a CAPE more than twice as high as that 1972 launch point.

I write this not to alarm but to reframe. The default assumption that "stocks beat inflation" is true over long enough horizons. It is not reliably true over the kind of horizons that matter for someone who is retired, near retirement, or actively drawing on a portfolio for income. The 1970s taught us that real returns can be negative for a full decade, and they taught us that the worst real returns come precisely when investors enter the period at high valuations.

I believe the right response is not to abandon equities. It is to be thoughtful about how much equity exposure makes sense, what kind of equity exposure --- because not every part of the market trades at a CAPE of 41 --- and to ensure the portfolio has meaningful exposure to assets that historically did well in 1970s-style environments. Real assets, shorter-duration credit, and selectively positioned equity exposure all have roles to play. Adaptive Allocation is built precisely for this kind of moment --- a regime where the right answer two years ago is unlikely to be the right answer two years from now, and where dynamic adjustment to changing signals matters more than commitment to a static allocation.

Our team continues to monitor inflation prints, energy markets, the path of AI capital spending, and the Federal Reserve transition with discipline. When conditions warrant action, we act. When they warrant patience, we wait. The goal, always, is to protect purchasing power across whatever environment unfolds.

If the 1970s rhymes again, the cost of complacency will be high. I would rather have this conversation now, when there is still time to position thoughtfully, than to have it in hindsight.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

1. U.S. Bureau of Labor Statistics, Consumer Price Index Summary, April 2026 (released May 12, 2026). https://www.bls.gov/news.release/archives/cpi_05122026.htm

2. Trading Economics, "US 10 Year Treasury Note Yield," May 2026. https://tradingeconomics.com/united-states/government-bond-yield

3. Wikipedia, "2026 Strait of Hormuz crisis," accessed May 2026. https://en.wikipedia.org/wiki/2026_Strait_of_Hormuz_crisis

4. CNBC, "Tech AI spending approaches $700 billion in 2026," February 6, 2026. https://www.cnbc.com/2026/02/06/google-microsoft-meta-amazon-ai-cash.html

5. Multpl, "Shiller PE Ratio," May 2026. https://www.multpl.com/shiller-pe; heygotrade.com, "CAPE Ratio in May 2026."

6. United Against Nuclear Iran, "Iran War Shipping Update," May 11, 2026. https://www.unitedagainstnucleariran.com/blog/iran-war-shipping-update-may-11-2026

7. ING Think, "Oil forecasts raised as prolonged Strait of Hormuz disruption continues," April 2026. https://think.ing.com/articles/oil-forecasts-revised-higher-as-strait-of-hormuz-disruption-drags-on280426/

8. FXDailyReport, "WTI Crude Oil Price Analysis for May 21, 2026." https://fxdailyreport.com/wti-crude-oil-price-analysis-for-may-21-2026/

9. Tufts Now, "Re-Opening the Strait of Hormuz Won't Restore the Status Quo," May 4, 2026. https://now.tufts.edu/2026/05/04/re-opening-strait-hormuz-wont-restore-status-quo

10. Bloomberg, "Strait of Hormuz Shipping Stalls as US-Blocked Tanker Resumes Voyage," May 17, 2026. https://www.bloomberg.com/news/articles/2026-05-17/hormuz-tracker-gridlock-persists-while-blocked-tanker-sails-on

11. PBS NewsHour, "U.S. says 2 merchant ships have crossed the Strait of Hormuz as Navy helps to restore shipping traffic," May 2026. https://www.pbs.org/newshour/world/u-s-says-2-merchant-ships-have-crossed-the-strait-of-hormuz-as-navy-helps-to-restore-shipping-traffic

12. CNBC, "Global oil stockpiles could hit record lows if Strait of Hormuz remains closed," May 16, 2026. https://www.cnbc.com/amp/2026/05/16/oil-inventory-stockpile-iran-war-strait-hormuz.html

13. ING Think, "Oil forecasts raised as prolonged Strait of Hormuz disruption continues," April 2026.

14. Statista, "Big Tech's AI Spending to Reach $725 Billion in 2026"; Yahoo Finance, "Hyperscalers Hit $700 Billion in 2026 AI Spending Plans." https://www.statista.com/chart/35046/capital-expenditure-of-meta-alphabet-amazon-and-microsoft/

15. TrendForce via Yahoo Finance, "North American AI Data Center Expansion Drives 2026 CapEx of Top Nine CSPs to US$830 Billion." https://finance.yahoo.com/sectors/technology/articles/north-american-ai-data-center-120000137.html

16. St. Louis Fed, "Tracking AI's Contribution to GDP Growth," January 2026. https://www.stlouisfed.org/on-the-economy/2026/jan/tracking-ai-contribution-gdp-growth

17. CNBC, "Electricity prices rising by double the rate of inflation. Data center demand means no relief ahead," February 12, 2026. https://www.cnbc.com/2026/02/12/electricity-price-data-center-ai-inflation-goldman.html

18. Spotlight PA, "Data centers are straining the grid. Can they be forced to pay for it?," April 2026. https://www.spotlightpa.org/news/2026/04/data-centers-electricity-prices-rising-ai-power-demand-environment/

19. Federal Reserve History, "Oil Shock of 1973-74." https://www.federalreservehistory.org/essays/oil-shock-of-1973-74

20. Federal Reserve History, "The Great Inflation." https://www.federalreservehistory.org/essays/great-inflation

21. Simple Stock Investing, "S&P 500: Total and Inflation-Adjusted Historical Returns." http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

22. Federal Reserve Board, FOMC Statement, April 29, 2026. https://www.federalreserve.gov/newsevents/pressreleases/monetary20260429a.htm; iShares, "Fed Outlook 2026."

23. Intrinsic Investing, "That 70's Show – Lessons of the 1970's and the Course Ahead." https://intrinsicinvesting.com/2023/04/27/that-70s-show-lessons-of-the-1970s-and-the-course-ahead/

24. Macrotrends, "S&P 500 Historical Annual Returns." https://www.macrotrends.net/2526/sp-500-historical-annual-returns

25. Intrinsic Investing, "Equity Duration & Inflation: Lessons from the Nifty Fifty," September 2022. https://intrinsicinvesting.com/2022/09/13/equity-duration-inflation-lessons-from-the-nifty-fifty/; Bridgeway Capital Management, "Party Like It's 1972."

26. Macro Tides, "A Secular 15 Year Bear Market Is Coming." https://www.macrotides.com/newsletter/501/secular-15-year-bear-market-coming

27. Multpl, "Shiller PE Ratio by Year." https://www.multpl.com/shiller-pe/table/by-year

28. FactSet, "S&P 500 Earnings Season Update," May 2026. https://insight.factset.com/sp-500-earnings-season-update-may-8-2026

29. Macro Tides, "A Secular 15 Year Bear Market Is Coming."

30. Gurufocus, "S&P 500 Shiller CAPE Ratio Charts." https://www.gurufocus.com/economic_indicators/56/sp-500-shiller-cape-ratio

31. Federal Reserve Board, "Federal Reserve Board names Jerome H. Powell as chair pro tempore," May 15, 2026; Kiplinger, "The New Fed Chair Was Announced: What You Need to Know." https://www.federalreserve.gov/newsevents/pressreleases/other20260515a.htm

32. Multpl, "Shiller PE Ratio by Year," historical data for 1972. https://www.multpl.com/shiller-pe/table/by-year

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