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Thought of the day

The price of Brent crude oil rose by around 6% on Wednesday, climbing above USD 78/bbl for the first time in two weeks, after tensions between the US and Iran re-escalated. The US military on Tuesday launched a series of new strikes against Iran and revoked a license allowing the Islamic country to sell oil after three tankers were hit by projectiles in the Strait of Hormuz. President Trump said on Wednesday that he believes the Memorandum of Understanding with Iran, which set the stage for talks toward a permanent resolution to the conflict, "is over." He added that talks Iran were "a waste of time."

Iran’s foreign ministry said the US move breached the framework agreement the two sides reached last month to end the war, adding that it would take any measure it deemed necessary to safeguard its interests and national security. The 10-year US Treasury yield rose above 4.57%, the highest level in nearly four weeks. S&P 500 futures were down 1% ahead of the start of US trading.

We have held the view that the path toward a lasting peace deal is likely to be bumpy, with periodic flare-ups in tensions potentially triggering bouts of market volatility. But we also believe both sides remain incentivized to keep the Strait open, and that investors should retain diversified portfolios.

Strong earnings growth should drive equity markets higher. We see room for global equities to move higher, driven not just by continued strength in AI growth, but also by a resilient economic backdrop that should support earnings growth outside the AI complex. Secular trends such as electrification and longevity should underpin further gains in sectors including utilities and health care, while the increase in global manufacturing activity points to improving conditions for industrials and other cyclical parts of the market. We forecast 21% earnings growth for global stocks (MSCI ACWI) this year, followed by another 12% increase in 2027.

Elevated yields offer an opportunity to secure appealing portfolio income. Persistent inflation concerns have kept global bond yields elevated, but we expect them to fall as the year progresses. We believe policymakers are likely to maintain their hawkish stance for a while longer, but once they become more confident that second-round inflation effects are limited, a softening of central bank rhetoric should support lower bond yields through the second half of the year. In the US, recent data suggested that tariff effects are shifting onto a disinflationary path, and the labor market is not overheating. Lower Federal Reserve policy rates next year should help drive yields lower, benefiting short- to medium-maturity quality bonds.

Broad commodity exposure can provide diversification benefits. The latest hostilities in the Middle East underscore the challenge for shipping confidence to be fully restored in the near term. Coupled with the Strait’s reduced capacity to accommodate ships traveling through the waterway, and a likely slower-than-expected process of production recovery, we expect Brent crude oil prices to rise to USD 85/bbl by the end of this year. This supports our positive view on broad commodity exposure in a portfolio context—energy can help buffer against renewed supply disruptions, El Niño-related risks may support agricultural commodities, and AI and electrification trends remain positive for industrial metals.

So, while markets may swing in response to fresh geopolitical headlines, investors should stay the course with a portfolio that is well diversified across asset classes, regions, and sectors. Investors can also consider capital preservation strategies for more defensive equity positioning.