Weekly market commentary

Supply disruptions emanating from the Middle East conflict have piled onto inflation pressures that were already bubbling under the surface. This week’s central bank run lays bare the bind policymakers face between reining in inflation and supporting growth and jobs. We think higher yields are here to stay – and that long-term government bonds are no longer effective diversifiers against equity declines. We stay overweight U.S. and EM equities on the rapid AI buildout.

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Too hot for comfort
Annual core services inflation, 2006-26

Markets projected U.S. rate cuts before the Iran war erupted – and ignored signs that inflation’s downward trend had already stalled as core services inflation remained stubbornly high. See the chart’s inset on the right. The reason: An aging population and immigration curbs make for a tight labor market. Add the AI-led capex boom and tariff-driven goods inflation, and it becomes clear why broader core inflation is running above central bank targets. Markets flipflopped when the Middle East supply disruptions caused price spikes in energy and base chemicals. They are now pricing out U.S. rate cuts this year and expect the European Central Bank to hike instead of staying put. This shift reflects a recognition that inflation is running above pre-pandemic levels – a trend we see persisting for now.

The big picture is that we are in a world shaped by supply. The Middle East conflict has supercharged existing supply constraints and intensified mega forces – structural changes such as the energy transition, geopolitical fragmentation and AI disruption. Supply disruptions of energy, chemicals and other industrial materials are increasing inflation pressures, albeit with disparate effects across regions. Europe and parts of Asia are feeling the brunt given their dependence on imported energy. The U.S. is more shielded as a net energy exporter. The conflict is reinforcing the resolve of governments around the world to invest in energy security and defense, adding to towering debt loads and putting upward pressure on inflation.

A stark trade-off for central banks

At the same time, an accelerating AI buildout is creating outsized demand for energy, data centers and specialized labor. This is bumping into worsening capacity and political constraints that are increasing costs. Prices of key AI inputs such as semiconductors are rising as capacity struggles to keep pace with demand. We think AI’s productivity gains could quickly offset such “chipflation” and other price pressures – and push down inflation. But this hasn’t happened yet.

Such is the backdrop for the Fed and other major central banks as they meet this week. They face a stark trade-off between trying to bring down inflation or supporting economic growth and jobs. No change in policy rates is expected, and the key is to watch for signs whether policymakers are growing concerned about persistent inflation, even if they look through price pressures caused by Middle East supply disruptions.

We stay risk-on in this environment. We are overweight U.S. and EM equities as major AI firms are now showing they can monetize their tools. We stay underweight long-term government bonds. They struggled to offset equity declines throughout the Iran war. This underscores the “diversification mirage” outlined in the Q2 update to our 2026 Global Outlook: This is a structural feature of the post-pandemic environment as the term premium – the extra compensation investors demand for holding long-term bonds – rises on concerns over high debt loads. We prefer short-dated credit and Treasuries for quality income instead, and EM hard-currency debt as it leans toward commodity exporters benefiting from supply disruptions.

Our bottom line

We prefer stocks over bonds as we see inflation pressures keeping interest rates higher for longer. We also eye thematic opportunities across power and infrastructure on AI demand and a scramble for energy security.

Market backdrop

The S&P 500 notched a fresh record even as oil prices rose as shipping traffic in the Strait of Hormuz almost crawled to a halt. This shows the AI mega force is shaping up even stronger than we envisaged in our 2026 Global Outlook. Previous market skepticism over AI — that major players were spending heavily but not making money — is dissipating and turning into belief. AI adoption is rising and revenue growth is accelerating.

We focus on a packed week of central bank decisions. We expect the Fed, ECB, BoE and BoJ to hold rates steady – though the latter is more finely balanced. Even if the BoJ stays on hold, we expect policymakers to signal more hikes are on the table this year. We watch the ECB and BoE decisions to see if they will look through energy-driven inflation rather than respond to the risk of it spreading into wider price pressures.

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, April 2026

Tactical granular views table

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

Granular views

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

Euro-denominated tactical granular views

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