MAY 2026
The Gulf conflict has birthed the third major global supply shock of the 2020s, following the Covid disruption and last year’s tariff war.
Historically, such events may have been enough to derail risk assets for a prolonged period. Yet markets continue to bounce back strongly.
This chart highlights the parallels to the 2025’s first half sell-off.
This time last year, global stock markets were experiencing a 15-20% correction (blue line), before a strong second half saw them finish with big gains for the year.
The S&P 500 is tracking a similar path in 2026 (red line) with the late Q1 drawdown being more than offset by April’s impressive rebound.
There are good reasons for this resilience; strong corporate earnings, supportive liquidity conditions and many investors remain under-positioned after multiple macro scares.
Bearish headlines still dominate sentiment, but price action tells a more constructive story.
One reason why equity markets are proving to be so resilient is that valuations are not yet at the extremes that historically preceded major market dislocations.
The chart shows that US large cap stocks are currently trading around 21x forward earnings.
However, this assumes a punchy 18%y/y profits growth for calendar year 2026 (source: Factset), which leaves little room for disappointment.
The market’s ability to push higher from here thus increasingly depends on whether optimistic earnings forecasts are delivered.
The tech sector will be key. It is the dominant driver of overall profits growth so any signs that the AI-capex boom is waning, will likely dampen investor sentiment.
Conversely, headline valuations appear manageable if profits momentum remains strong.
The optimism surrounding 2026 earnings forecasts stems from the fact that economic activity is holding up.
Before the Gulf conflict began, the Chinese economy was showing signs of life and US GDP was seeing renewed upward momentum.
Whilst the threat of a sustained supply shock lingers, it appears the Strait of Hormuz blockage is yet to derail global growth.
This chart uses the new orders component of the ISM survey (red line) as a lead indicator for broader economic activity and, by extension, corporate profits.
It has been picking up in recent months despite the geopolitical turmoil, suggesting EPS growth (blue line) should soon follow suit.
This correlation would be tested in the face of a sustained rise in oil prices or renewed uncertainty.
But, for now, the underlying message is that macro fundamentals are stronger than feared, which helps to keep the earnings story intact.
Bond markets tend to set the tone for broader risk assets with sharp increases in US Treasury yields and credit spreads typically a harbinger of equity market unrest.
This was the case in 2021/22 when intense inflation fears sparked a sudden spike in borrowing costs. A major sell-off in stock markets soon followed.
Encouragingly, these two charts show that neither US Treasury yields (blue line), nor high yield credit spreads (red line) have reacted adversely to the Middle East turmoil.
This orderly behaviour suggests underlying liquidity conditions remain supportive.
Central Bank rate cuts may be off the table for now, but policymakers continue to provide “backdoor” support to prevent a disorderly unwind in bond markets.
And for as long as investors believe that bond yields are effectively capped, we are unlikely to witness the sort of fixed income weakness that normally precedes a major equity bear market.
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