In this week’s update from Fidelity, Tom Stevenson comments as shares give back some of last week’s gains on stalling peace talks and US threats to blockade the Strait of Hormuz.
A weariness is setting in as investors increasingly choose to wait and see while tensions in the Gulf ebb and flow. With sentiment having swung back and forth since the beginning of March, but markets remaining at or slightly above where they started the year, no-one is willing to take big bets until it is clearer where the US-Israel-Iran conflict is heading.
Meanwhile, companies and households are getting on with their lives, acclimatising to what looks like a persistently higher oil price, rising inflation and higher for longer interest rates. This week, the US reporting round gets underway once more, with first quarter results shining a light on how geo-politics is showing up at the coalface of business and the broader economy.
The next chapter in the Gulf
We have become used to major developments in the Middle East conflict emerging over the weekend, with markets making their assessment at the open on Monday. Once again, that’s been the pattern this week, with news over the weekend that peace talks in Pakistan had stalled, followed quickly by an announcement that the US would be introducing a blockade on shipping through the Strait of Hormuz to apply further leverage to the Iranian side.
The market reaction to this new chapter in the conflict was predictable. The oil price rose sharply, moving above $100 a barrel again, as the US indicated that its tolerance of Iranian oil exports would be curtailed. Iran has been exporting crude throughout the conflict, in contravention of sanctions but with the tacit approval of the US, which has been keen to keep the price of oil manageable in the run up to elections later this year.
The prospect of higher for longer oil duly took the wind out of the sails of equity markets, which had risen strongly last week on hopes for an early end to hostilities as the two sides got together in Islamabad to discuss a possible ceasefire. Shares in Asia and then Europe fell back modestly, although they remain well ahead so far in April and not far below the highs reached in January and February before the conflict began.
Japanese shares closed higher after falling initially and the Nikkei 225 index remains 14% up year to date. Emerging markets shares have also bounced back from March’s falls to be 11% up since January. UK and European shares are up in the single digits, year to date, while US indices and China, which had underperformed in the first two months of the year, are flat over the first 100 or so days of 2026.
At the same time, the likelihood of continuing upward pressure on inflation from a higher oil price fed through into bond yields. Rising yields equate to falling bond prices, confirming the now positive correlation between bond and equity prices. They are rising and falling in lockstep. In the UK, the 10-year government bond yield edged up 2 basis point to 4.86%. Japanese bonds yielded 2.5% briefly, their highest point so far this century.
In currency markets, the dollar edged higher against the pound and euro but eased slightly against the yen and Swiss franc.
Standing back
So, with investors broadly sitting on their hands, it’s a good moment to stand back and look at the fundamentals.
That’s particularly the case, with attention about to shift back to corporate earnings, as the first quarter reporting season gets underway with the US banks as usual kicking things off this week.
The technical picture remains within normal bounds. Markets fell back after the conflict began five weeks ago but never really plumbed the depths at which they were obviously oversold. The stocks which had been driving markets higher last year and into this – those closest to the AI story – have bounced back to new highs but without really dragging the rest of the market up on their coattails.
The closest template for the market reaction so far has been the 1990 Gulf War, when oil spiked higher but quickly fell back. Stock market valuations fell sharply then but also rallied quickly. It was a classic V-shaped correction. Only time will tell if that analogy holds this time.
In large part that could be determined by the fundamentals of earnings and valuations. On that front, company profits look to be firmly in a mid-cycle growth phase. The outlook for first quarter earnings is yet another quarter of double-digit gains – perhaps 16-17%. Operating margins remain high, and credit spreads are still not showing any sign of distress.
Valuations have been doing all the work in markets. After falling by around 19% from the peak, last week’s rally took the valuation correction back to about 13%. Those cheaper valuations provide some justification for share prices at today’s level. They point to a news-driven market from here, with positive indications from the Gulf fuelling further rallies and bad news leading to pull backs.
In other news
Meanwhile, away from the Gulf and the oil price, European politics was back in focus over the weekend as Hungary voted to end 16 years in power for Hungary’s anti-EU prime minister, Viktor Orban, the longest-serving leader in the region who has been a close ally of both Vladimir Putin and Donald Trump.
Orban conceded defeat to his rival Peter Magyar, who has promised to repair relations with the EU and unblock funding from the bloc for Ukraine’s war against Russia. Markets responded positively, with a 2% rise in the Hungarian forint against the euro.
