MARKET INSIGHTS

Weekly market commentary

26-Oct-2026
  • BlackRock Investment Institute

The Mideast energy shock’s next phase

Market take

Weekly video_20261026

Ehsan Khoman

Economist

BlackRock Investment Institute

SCRIPT

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CAPITAL AT RISK. MARKETING MATERIAL.

Opening frame: What’s driving markets? Market take

Camera frame

Title slide: The Middle East energy shock’s next phase

The global economy proved resilient to the Middle East energy shock. Now, buffers that helped soften the initial hit to economic growth like strategic reserves and rerouted oil shipments are weakening, and supply constraints are moving downstream.

1: A more nuanced story

Brent crude oil jumped to a five-month high last week. But oil prices are only part of the evolving Middle East conflict story. Early on, the focus was on crude supply. Now, the pressure has moved downstream to refining and shipping bottlenecks. That’s pushed up the delivered cost of fuel and helped refinery and tanker stocks far outpace major oil and gas producers. After those sharp gains, what matters now is which bottlenecks persist, even if the conflict ends.

2: Uneven effects

The global economy has weathered the energy shock better than expected, thanks to AI investment and government spending, but not everyone is feeling it equally. Europe is more vulnerable, particularly with gas reserves at historically low levels heading into winter. Meanwhile, the US has so far had a much bigger cushion as a net energy exporter.

That’s accelerating the push for more resilient energy systems. Importers are diversifying their energy supplies, while exporters are investing in new routes around vulnerable chokepoints. We think that shift could outlast the conflict, creating investment opportunities but also requiring huge amounts of capital and putting upward pressure on government bond yields.

3: Selectivity is key

So, where does that leave us as investors? The focus is on refining and energy infrastructure, or where bottlenecks could persist. We’re also selective across regions, with Europe more exposed to higher energy costs and the US less exposed to the worst outcomes.

In bonds, higher yields have made US Treasuries more attractive. We prefer shorter-term bonds for their income, as the investment needed to strengthen energy security could put upward pressure on longer-term yields.

Outro: Here’s our Market take

We think some of today’s energy constraints could outlast the Middle East conflict. That keeps us selective, favoring opportunities where energy constraints and margins look durable.

Closing frame: Read details: blackrock.com/weekly-commentary

An evolving conflict

The Middle East conflict is exposing longer-term energy constraints as buffers that absorbed the initial shock weaken. Selectivity is key in this environment.

Market backdrop

The Nasdaq fell nearly 1% last week and US Treasuries rallied as investors sought safety from the tech stock selloff. Brent crude oil hit a six-month high.

Week ahead

We eye the Fed’s second-to-last policy meeting of 2026. We expect another hike by year-end but see market pricing for further tightening as overly hawkish.

The global economy and markets have proved resilient to the Middle East energy shock. Strong AI investment and fiscal spending have cushioned the hit to growth, while supply buffers helped absorb much of the initial shock. Now, renewed attacks targeting energy sites and shipping in the Gulf are testing these buffers just as they’re thinning, while supply constraints are moving downstream. Selectivity is key as new vulnerabilities emerge across regions, sectors and asset classes.

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Market commentary Asset class views
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Scarcity pays downstream

Selected oil industry sub-sector equity performance, 2026

This chart shows 2026 equity performance across four oil industry subsectors. Refiners and tanker operators have pulled ahead of LNG exporters and oil and gas majors, with refiners showing the strongest gains.

Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute with data from Bloomberg, October 2026. The chart shows the equal-weighted average equity returns of selected companies across four oil industry sub-sectors, rebased to 100 on Jan. 2, 2026. Returns are based on weekly observations and exclude dividends.

Brent crude oil surged back to around $117 a barrel last week, its highest since April. But oil prices tell only part of the story of how the energy shock has evolved. The initial disruption centered on crude supply, but rerouted shipments, inventories and strategic reserves helped absorb much of the shock. Now scarcity has shifted downstream. Even as crude supplies recover, refining and shipping bottlenecks have pushed the delivered cost of fuel from the Middle East to Asia to more than twice prewar levels. This helps explain why shares of refiners have jumped some 160% this year, while shares of tanker operators have climbed 120%. See the chart. Both have far outpaced the 40% gain in major oil and gas producers, even as energy has become the top-performing sector globally. But after such sharp gains, how much further these stocks can run depends on which bottlenecks persist, even if the conflict ends.

Global growth has held up thanks to strong AI investment and government spending. Much of the initial inflation shock is already reflected in headline inflation, but higher fuel costs are starting to feed into some core inflation categories. As we’ve previously noted, the energy shock has uneven effects: we estimate it’s reduced GDP by about 0.5% in Europe, compared with just 0.1% in the US Those differences could become even more pronounced. Europe looks particularly vulnerable, with natural gas storage at around 75% – its lowest seasonal level since recordkeeping began in 2011 – while disrupted supplies of liquefied natural gas complicate efforts to rebuild reserves. A colder winter could push European energy prices, already up 170% this year, higher. The US is better insulated as a net energy exporter, while strong tech exports have cushioned Asia from higher import costs. The shock’s uneven impacts are accelerating efforts to bolster energy resilience and security.

Selectivity is key

That is creating new investment opportunities – but at a cost. The geopolitical fragmentation mega force we’ve long described reinforces this shift, raising the value of infrastructure that protects against future shocks. Energy importers are diversifying both traditional fuel supplies and electrification, underscoring the energy transition and resilience mega force. Exporters, including those in the Middle East, are investing in alternative routes to bypass vulnerable chokepoints. We see this as a structural shift that could outlast the conflict. Yet building these contingencies requires substantial investment, which could intensify competition for capital and put further upward pressure on sovereign bond yields.

We favor opportunities where energy constraints and profit margins look durable and valuations remain attractive. For now, existing energy equity exposures could deliver strong earnings as oil prices and refining margins stay elevated. But after this year’s oil rally, we also see opportunities in select US and European utilities hit by rising bond yields. In bonds, higher yields support our recent upgrade to US Treasuries. We prefer short-term bonds for income, as growing energy security investment could increase competition for capital and push longer-term yields higher.

Our bottom line

The Mideast energy shock is exposing longer-term constraints that could outlast the conflict. We favor selective exposure to energy infrastructure and short-term income over broad market bets.

Market backdrop

Tech stocks swung sharply last week as investors stepped up scrutiny of the AI trade, pushing the Nasdaq down roughly 1% despite strong earnings from some of the sector’s biggest names. The S&P 500 fell 0.4%, with a rotation into defensive sectors helping limit losses. US 10-year Treasury yields slipped below 5% as investors sought refuge from the tech selloff. Brent crude oil touched a six-month high of $117 a barrel on concerns about further disruption to Middle East energy flows. 

The Federal Reserve’s interest rate decision takes center stage this week after a hotter-than-expected September CPI report showed price pressures broadening. Even as we expect another hike by year-end, we don’t view recent tightening as the start of a sustained hiking cycle. Markets have partially scaled back expectations for further hikes since the September meeting, moving closer to our view.

Week ahead

Scarcity is paying downstream. Refiners and tanker operators have sharply outperformed LNG exporters and oil and gas majors in 2026, as constraints shift further along the energy supply chain.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of October 22, 2026. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.

Oct. 27

US consumer confidence; Japan services PPI

Oct. 28

US Fed rate decision

Oct. 29

US GDP & PCE

Oct. 30

EU flash GDP & unemployment; BoJ rate decision; Japan CPI

Read our past weekly commentaries here.

Intersecting mega forces

Since we launched our mega forces framework it has become clearer how their intersection shapes almost all our investment views and opens up alpha opportunities. They cut across asset class labels, spurring a rethink of portfolio construction. Investors need to be deliberate about the economic or thematic exposures they own, the vehicles they use to implement them and their investment horizons.

The chart shows BlackRock's five mega forces framework and how their intersection shapes investment views and opens up investment opportunities.

From drivers to portfolio expressions

Our highest conviction views, October 2026

Driver What we think Portfolio expression
Growth and AI scarcity AI fundamentals are strong, but we eye near-term volatility. Neutral US equities and overweight EM equities; favor AI- and tech-related opportunities.
Duration and diversification Higher starting yields improve prospective returns and income. Overweight short-term US Treasuries for solid income and a cushion against higher rates; neutral long-term Treasuries
Credit spreads and liquidity Selectivity is crucial amid tight spreads and uneven fundamentals. Credit with clear cash flows, lender protections and recovery value; higher-rated high yield.
Inflation and scarcity Scarcity, secure supply and power demand carry inflation risks. Infrastructure, energy bottlenecks, EM local debt and real-asset-linked exposures.
Alpha opportunity Macro outcomes matter again in the new regime. Macro hedge funds, venture capital, market-neutral strategies, and selected private credit and non-US alpha.

Note: Views are from a US dollar perspective, October 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security. 

Asset class implications

Six- to 12-month tactical positioning, October 2026

This shows the implementation of our key investment views from the previous page through an asset class lens.

Legend Granular
Asset   Tactical view Commentary
Equities      
United States   United States: tactical neutral We are neutral. Strong AI fundamentals remain supportive, but policy uncertainty could fuel near-term volatility. We continue to favor AI and tech.
Europe   Europe: tactical neutral We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform. We favor financials, infrastructure, and industrials.
UK   UK: tactical neutral We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.
Japan   Japan: tactical neutral We are neutral. Strong corporate balance sheets and governance reforms remain supportive. We prefer targeted exposures to physical AI and the buildout’s bottlenecks. 
Emerging markets (EM)   Emerging markets: tactical overweight +1 We are overweight. Strong earnings and cheaper valuations create opportunities. We particularly like different expressions of the AI scarcity theme across Asia and Latin America.
China   China: tactical Neutral We are neutral. We see opportunities in physical AI. Cheap, open-source AI could drive adoption, but that doesn’t necessarily translate into AI-provider profitability.
Fixed income      
Short US Treasuries   Short US Treasuries: tactical overweight +1 We are overweight. Much of the repricing we anticipated has occurred, and expectations for further Fed hikes look excessive. We favor the front end for attractive income and a greater breakeven buffer.
Long US Treasuries   Long US Treasuries: tactical Neutral We are neutral. Higher yields offer attractive income and a bigger cushion against further rate increases. We still see room for yields to rise as competition for capital intensifies.
Global inflation-linked bonds   Global inflation-linked bonds : Neutral We are neutral. We see inflation settling above pre-pandemic levels, but markets may not price this in the near term as economic growth could slow.
Euro area government bonds   Euro area government bonds: tactical Neutral We are neutral short- and medium-term bonds. Current ECB rate pricing looks fairly valued given the balance of risks. Higher energy prices could push rates higher. We prefer to deploy risk elsewhere.
UK Gilts   UK gilts: tactical Neutral We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive.
Japanese government bonds   Japan government bonds: tactical Underweight -1 We are underweight. The substantial repricing in yields has improved the risk-reward, but further rate hikes and heavy issuance could push yields higher.
China government bonds   China government bonds: tactical Neutral We are neutral. China bonds offer stability and diversification but developed market yields are higher. A shift in investor sentiment toward equities limits upside.
US agency MBS   US agency MBS: tactical neutral We are neutral and lean into the stable income MBS provide despite tight spreads.
Short-term IG credit   Short-term IG credit: tactical neutral We are neutral. Spreads are tight due to corporate strength; they could widen if issuance increases or risk appetite shifts.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds. But attractive overall yields help offset the risk of increased issuance.
Global high yield   Global high yield: tactical Neutral We are neutral. High yield offers attractive income. We prefer higher-rated US and European high yield over investment grade and see dispersion of returns increasing. 
Asia credit   Asia credit: tactical Neutral We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight.
Emerging hard currency   Emerging hard currency: tactical underweight We are neutral. Fundamentals have improved, but we see a more attractive risk-reward profile in EM local debt.
Emerging local currency   Emerging local currency: tactical neutral We are overweight. We like the yield relative to its volatility and improving fundamentals.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2026

Legend Granular

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Neutral We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform and to justify a broad overweight. We stay selective, favoring financials, infrastructure, industrials, materials and healthcare.
Germany Germany: tactical Neutral We are neutral. Higher spending on defense and infrastructure support the corporate sector. Valuations are not stretched but neither compelling and expected earnings growth lags other countries. Light positioning means potential easing in geopolitical tensions and AI lifting industrials-driven earnings could create opportunities.
France France: tactical Neutral We are neutral. Strong expected earnings growth and global revenue exposure support French corporates. Valuations are less compelling, albeit not stretched versus euro area peers. Persistent political uncertainty leaves the overall risk reward balanced.
Italy Italy: tactical Neutral We are neutral. Earnings growth and momentum are strong, boosted by the significant exposure to financials, utilities and energy. Valuations are still at discount vs. peers, but not as much as in previous years. Political risk is currently low but likely to pick up ahead of 2027 elections.
Spain Spain: tactical Overweight +1 We are overweight. Valuations remain attractive vs. peers even if relative earnings momentum has slowed. Strong domestic demand growth and exposure to fast-growing areas like Latin America support Spanish stocks. Financials, utilities and infrastructure-linked stocks would benefit from Europe’s push towards autonomy.
Netherlands Netherlands: tactical Neutral We are neutral. Earnings revisions in the IT sector, a large sector in the Dutch stock market is offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers.
Switzerland Switzerland: tactical Neutral We are neutral. Valuations have improved, from stretched levels, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance.
UK UK: tactical Neutral We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.
     
Fixed income    
Euro area government bonds Euro area government bonds: tactical Overweight +1 We are neutral short- and medium-term bonds. Current ECB rate pricing looks fairly valued given the balance of risks. Higher energy prices could push rates higher. We prefer to deploy risk elsewhere.
German bunds German bunds: tactical neutral We are neutral Bunds. Current ECB rate pricing looks more fairly valued given the balance of risks. Fiscal stimulus and increased bond issuance exert upward pressure on yields, alongside inflation risks amid lingering geopolitical tensions.
French OATs French OATs: tactical neutral We are neutral. Elevated political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but these risks already seem priced into OATs and we don’t expect a material worsening from here.
Italian BTPs Italian BTPs: tactical Neutral We are neutral. The spread over German bunds looks tight given Italy’s large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and local demand for BTPs solid at current yield levels. Domestic disapproval would likely prevent defense spending from reaching fiscally unstable levels. Political uncertainty is likely to increase ahead of next year’s elections.
UK gilts UK gilts: tactical Neutral We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive.
Swiss government bonds Swiss government bonds: tactical Neutral We are neutral. The SNB seems comfortable with its medium-term inflation outlook and its current policy stance. Market pricing is broadly in line with SNB messaging.
European inflation-protected securities European inflation protected securities: tactical Neutral We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term.
European investment grade European investment grade: tactical Neutral European investment grade is supported by healthy corporate sector balance sheets, contained default rates and the persistently strong demand for durable income from European households. We prefer European investment grade over the US.
European high yield European high yield: tactical Overweight +1 We are overweight. While spreads are low, the income potential remains attractive. Defaults are contained and high yield is of higher quality and less sensitive to interest rate swings compared with the US.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, October 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Meet the authors

Wei Li

Wei Li

Global Chief Investment Strategist – BlackRock
Chris Weber

Chris Weber

Sustainable Investment and Research Analytics – BlackRock Investment Institute
Mark Hume

Mark Hume

Portfolio Manager, Thematics and Sectors Team - BlackRock Fundamental Equities
Ehsan Khoman

Ehsan Khoman

Economist — BlackRock Investment Institute

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