Weekly market commentary

We highlighted geopolitical risks and critical chokepoints as forces shaping markets in our 2026 Midyear Global Outlook. The latest Middle East escalation has brought those risks back to the fore. Yet markets have reacted less sharply, even as the global economy has fewer buffers against a prolonged energy shock. For now, we don’t push back against that assessment. We stay risk-on, but with a higher bar: earnings need to keep growing and outpace the rising cost of capital.

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A more muted response
Brent crude oil futures curves through the U.S.-Iran conflict

The Middle East conflict has escalated again after a short-lived U.S.-Iran diplomatic pause and tentative ceasefire collapsed. Yet the oil market is telling a more measured story. While Brent crude prices have risen by 13% since the latest flare-up, the futures curve suggests investors expect a temporary disruption—not a prolonged supply shock. See the chart. The relatively modest move further along the curve also reflects confidence that global oil supply can absorb the disruption—a view we don’t challenge today. High starting oil inventories, demand adjustment, supportive fiscal policy and ongoing AI-led investment have helped contain the shock without materially changing the global macroeconomic outlook so far. We estimate the conflict will shave around 0.4% off global GDP in 2026, with roughly 0.3 percentage points already reflected in market pricing.

For now, we see little evidence that the latest escalation will weaken economic growth enough to change our pro-risk stance. The AI investment boom—an important driver of growth—and our preference for AI infrastructure remain intact despite recent volatility. Today's global economy is also far less oil-intensive than previous energy shocks, making it more resilient to higher energy prices. Inflation is a different story. We estimate the conflict will add around 0.8 percentage points to global headline inflation—though the impact is unlikely to be uniform. Europe and parts of Asia remain more exposed given their reliance on energy imports. For example, roughly 65% of South Korea's oil imports and one-third of China's LNG imports move through the Strait of Hormuz. The U.S. is relatively more insulated, supported by greater energy independence and exposure to the AI investment cycle.

Immutable laws limit most extreme outcomes

Even so, a more resilient economy does not eliminate downside risks. Oil inventories have already been drawn down by about 0.5 billion barrels this year, leaving roughly 0.5 billion barrels readily available to absorb further disruption. Those buffers could shrink further if tensions spread beyond the Strait of Hormuz to other key export routes like the Bab el-Mandeb Strait. Yet we believe immutable economic laws can limit the most extreme outcomes. As we outlined in March, the knock-on effects of a prolonged energy supply disruption create economic and political pressures for de-escalation—leaving incentives for all sides to find an off-ramp, in our view.

Another reason we remain pro-risk? Earnings growth still comfortably outpaces the rising cost of capital. Markets are pricing a higher path for U.S. policy rates, while long-term government bond yields reflect concern over persistent inflation. Yet higher rates do not automatically translate into weaker equity markets. Companies with pricing power can pass higher costs through to customers, supporting revenues and earnings. That’s helped keep expectations high. Consensus now expects S&P 500 earnings to grow 25% in 2026, up from 18% just three months ago. We prefer U.S. equities over long-term government bonds—so long as earnings growth remains exceptionally strong while offsetting higher interest rates.

Our bottom line

While uncertainty has increased, we do not believe recent market moves warrant abandoning our overweight stance on U.S. equities and we remain risk-on. We remain nimble and prepared to adjust as the facts and markets evolve.

Market backdrop

A sharp selloff in semiconductor stocks weighed on the broader market, sending the S&P 500 and Nasdaq 2% and 3% lower last week. The Philadelphia Semiconductor Index fell 11% and briefly entered a bear market on concerns that lower-cost large language models from China could challenge frontier models. We think the market reaction overlooks the other side of the story: cheaper AI could broaden adoption and reinforce demand for AI infrastructure.

This week's macro calendar will test our view that the global economy is settling into a more balanced growth-inflation mix. The data will show whether resilient activity continues to coexist with gradually moderating inflation, helping determine how much room central banks have to ease policy ahead of next week's Fed decision.

Read our past weekly market 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.

Asset class implications

Six- to 12-month tactical positioning, July 2026

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

Euro-denominated tactical granular views

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

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.