Markets remain strikingly resilient despite geopolitical strain, but how they absorb economic and technological uncertainty will shape the path ahead.
Markets appear remarkably resilient in the face of the ongoing Middle East conflict. Despite a sharp rise in oil prices and a longer-than expected duration, equity markets remain near highs and credit spreads have retraced much of their widening. Expectations for US rate cuts later this year have shifted, with markets now anticipating a more extended period of policy restraint.
This may look like complacency, but instead it reflects how markets process and price risk and forms the basis of how we assess this crisis and its potential outcomes over the coming months.
Markets don’t wait for resolution
At the outset of the conflict, it was natural to look for a defined end point – a clear resolution. But markets do not wait for such a precise outcome. Instead, they continuously reassess the evolving and likely path of events in real time.
What matters to markets is not just the size of the shock, but its persistence and direction. A short-lived disruption, even if severe, can often be absorbed with limited long-term impact, as long as investors believe conditions are improving. As Figure 1 illustrates, recent market disruptions – from the Covid pandemic to the Trump tariffs of April 2025 – have seen the S&P 500 fall before quickly resuming its upwards trajectory. By contrast, a shock that endures, with no clear path to resolution, can have more significant implications for growth, inflation and asset prices.
Figure 1: Equity markets’ resilience to shocks
S&P 500 2019-2026
Source: Bloomberg, as of 18 May 2026.
Markets have so far responded primarily to the price effects of the conflict. Due to inherent lags in the system – oil that is now being consumed in many regions was shipped before the conflict escalated – the impact on physical supply has yet to emerge. A longer conflict will see a shift from price-driven effects to tangible constraints of supply, particularly in oil-importing regions. In that scenario, the economic impact would be much more pronounced.
For example, airlines globally have begun consolidating capacity in response to rising costs. In a supply-constrained environment, we could expect to see wholesale cancellations.
Markets are also assessing second-order risks. Consistently higher global oil prices could have multiple outcomes. On the one hand they could drive increased US exports as producers seek to capture higher global prices, tightening domestic supply and adding upward pressure on US energy costs.
Alternatively, US policymakers may seek to limit the impact on consumers, particularly with midterm elections approaching in November. This raises the possibility of a more inward-looking policy stance, prioritising domestic energy security. Such an outcome would restrict exports, exacerbate shortages elsewhere, and create additional headwinds for oil-importing economies, particularly in Europe and parts of Asia.
Ultimately, it is the persistence of the conflict and its associated outcomes that are key. A short disruption would likely prove manageable; a prolonged one would be far more consequential.
Assessing outcomes relatively
Another reason markets have remained measured is because investors assess outcomes in relative terms. Conditions are clearly worse than before the conflict – but not as severe as many had feared. With approximately 20% of global oil and liquefied natural gas flows passing through the Strait of Hormuz, a meaningful portion of supply has already been disrupted, and strategic reserves have been drawn down. As a result, even a swift resolution to the conflict would be unlikely to return prices to pre-conflict levels. Although an oil price in the $90 range – where we plausibly see it settling – is materially above the pre-war $65-$70, it is well below the peaks approaching $120 seen in the extremes of this conflict (Figure 2). For now, markets appear willing to anchor around that relative improvement.
Figure 2: Cost of crude soars
Oil price per barrel over the past six months (US$)
Source: Bloomberg, as of 18 May 2026.
Corporate fundamentals are also a key stabilising force, with robust earnings growth in both the US and Asia. In the US, technology companies continue to lead, supported by sustained capital expenditure in artificial intelligence (AI) and digital infrastructure. In Asia, earnings momentum is also strengthening, particularly among semiconductors, advanced manufacturing and AI-linked firms tied to the global technology supply chain. This resilience is helping anchor wider equity markets.
Credit markets reflect a similar balance. Spreads widened as risks rose but have since retraced much of that move. As we look ahead, however, we believe differentiation will increase. More consumer‑sensitive and lower-quality credits are particularly exposed to sustained energy costs, which gradually erode purchasing power. As such, persistence is once again key.
Central banks in a bind
The initial reaction to the conflict was to assume a straightforward transmission from higher oil prices to higher inflation – and, in turn, higher interest rates. Then, as now, we believe reality is more nuanced.1
In the near term, higher energy prices do push inflation higher. Over time, however, elevated oil prices act more like a tax on consumers and businesses, weighing on demand and slowing economic activity. This dynamic can offset some of the initial inflationary pressure. This raises the risk of a more ‘stagflationary’ backdrop, characterised by higher prices and slower growth.
Policymakers are acutely aware of the risks of responding too mechanically to supply‑driven inflation, especially when growth is already fragile (Figure 3). Raising rates in response to a temporary shock, only to reverse course later, would risk undermining credibility.
Figure 3: Global growth is fragile
2026 GDP forecast
Source: Bloomberg, as of 18 May 2026.
In the US, the dual mandate matters. Inflation pressures have increased, but labour market momentum is beginning to soften. In Europe and the UK, the picture is more complex, with weaker growth and greater exposure to energy imports amplifying the trade-offs.
In this context, we believe central banks are therefore likely to proceed cautiously, waiting for clearer signals before making significant policy adjustments. This suggests that market expectations for rate increases, particularly in the UK and Europe, may be overly pessimistic.
A shifting global framework
While the immediate focus is on the conflict, it is equally important to consider the broader structural backdrop.
For many years the global economic system was built on efficiency: finance-led growth and supply chains optimised to minimise costs. The smooth functioning of the global economy was largely taken for granted. However, we believe that environment is now changing – with significant implications for the future.
We are seeing a shift from a ‘just-in-time’ supply model toward one focused on ‘security of supply’. Governments that once cooperated within a mutually beneficial system are now more concerned with securing individual gains. Tariffs, reshoring mandates, semiconductor export controls – these all reflect global powers recalibrating to a new reality. While this may enhance resilience, it is inherently less efficient and likely to weigh on productivity and profitability over time, with important implications for growth, inflation and valuations.
At the same time, this transition is occurring amid a period of significant technological change, particularly in AI. The interaction between political fragmentation and technological advancement could become a defining feature of the investment landscape in the months and years ahead.
Positioning portfolios
Against this backdrop, our approach to portfolio construction is evolutionary rather than revolutionary. Diversification remains essential. In a world of greater uncertainty, fewer assumptions can be held with confidence, increasing the value of resilience across a range of outcomes.
At the same time, diversification does not preclude conviction. The scale and persistence of capital investment in AI and technology – particularly across infrastructure, energy systems, data centres and semiconductors – remains a powerful structural theme.
The balance, therefore, is between resilience and selectivity: broad diversification combined with targeted exposure to areas supported by sustained investment rather than short-term sentiment. The objective is to build portfolios that remain robust across outcomes while capturing the opportunities created by structural change.
The bottom line
We believe the direction of travel will be the key driver of markets in the coming months. For now, markets are prepared to look through the disruption. If there are signs of stabilisation in the Middle East and a credible path toward resolution, resilience could persist – even in the face of elevated prices and uncertainty. But that willingness is not unlimited. If the conflict drags on without progress, or if supply constraints evolve into outright shortages, sentiment is likely to shift more decisively.
Meanwhile, a broader structural reset is underway. The foundations of the global economic model, built over decades of efficiency and integration, are being remade by political and technological change.
In a world shaped by both cyclical uncertainty and structural upheaval, adaptability and disciplined active management will be essential.
