Markets weigh Middle East uncertainty against solid fundamentals

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Oil prices jumped on Monday as the US seizure of an Iranian-flagged vessel in the Gulf of Oman suggested a flare-up in US-Iran tensions amid a lack of progress in peace talks over the weekend. Brent crude oil rose 5.6% to above USD 95/bbl at the time of writing, while S&P 500 futures were pointing 0.6% lower ahead of the US market open. The US dollar strengthened, and gold slid below USD 4,800/oz.

But despite more cautious sentiment, Asian stocks were relatively resilient on Monday, with the Nikkei 225 posting a gain of 0.6%. Global equities recorded 11 straight days of gains before the weekend, and the S&P 500 has rebounded 12.3% since the end of March.

We think the medium- to longer-term upward trend in global equities remains intact, but investors should be prepared for bouts of near-term volatility as markets weigh Middle East uncertainty against solid fundamental support.

Energy flows from the Strait of Hormuz remain disrupted amid uncertain prospects for US-Iran talks. It is unclear whether any fresh round of negotiations will take place between Washington and Tehran in the coming days before the two-week ceasefire expires, and the differences between the two sides appear to remain large. The US says it wants a verifiable guarantee Iran won’t build a nuclear weapon, limits on enrichment, and the removal of highly enriched uranium. Iran, on the other hand, is likely to want to keep some enrichment capability and sanction relief in exchange for limits. This negotiation gap, along with the control of the Strait of Hormuz, suggests that higher energy prices and supply chain disruptions could persist before a definite agreement is reached.

Solid profit growth should underpin stock performance. The first-quarter US earnings season started off strongly, with nearly 90% of the companies that have reported so far beating sales and earnings estimates. Guidance has also been better than feared despite the uncertainty in the Middle East, boosting investor confidence. Additionally, banks categorized consumers as “resilient,” and reported strong loan growth, stable credit trends, and robust trading activity. With the US economy still in good shape, we expect earnings per share growth of 17% for the first quarter to underpin the S&P 500’s move higher.

The Federal Reserve’s easing bias remains supportive. While de-escalation in the Iran war was the catalyst for the equity recovery over the past three weeks, the rally was fueled by investor positioning. Short covering, the closing of downside hedges, and some re-risking have amplified the rally, contributing to another recent episode of brief but steep V-shaped pricing patterns. This was the case in April 2025 around “Liberation Day,” in July-August 2024 during a growth scare, from March to May 2023 following Silicon Valley Bank’s collapse, and during the height of the COVID pandemic in March-April 2020. The lesson from these episodes, in our view, is that once investors are confident that growth will be resilient and the Fed won’t try to tighten financial conditions, risk assets tend to recover from selloffs very quickly. Our base case remains that the US central bank will be able to resume interest rate cuts later this year as inflation cools and growth moderates.

So, while further market swings are likely as investors react to fresh geopolitical headlines, we think evidence confirming that growth remains resilient and that any inflation spike will be transitory should support risk assets. We continue to suggest that long-term investors stay invested with diversified equity exposure, and see value in quality bonds, gold, and broad commodities as portfolio diversifiers.