Geopolitics Cool as Equity Markets Heat Up

The equity market has been shrouded by uncertainty since the start of the year. While much of the focus of late has been on the Iran War and the S&P 500’s associated 8% drawdown, the U.S. large cap equity market has struggled since late 2025. A weakening labor market, Artificial Intelligence (AI) disruption fears, tariff uncertainty, and a run on private credit lending vehicles were bricks in a wall of worry the market was unable to scale. Brent crude oil spiked 63% between the start of U.S. strikes on Iran and the recent peak on March 31 (but over 100% since the low on December 16, 2025), which proved to be too much for a fragile equity market, at least temporarily.

But the equity market is far from broken. The S&P 500 has now climbed 10.5% in the last 11 trading sessions, an even faster bounce back than after Liberation Day, bringing it to a new all-time high. The Nasdaq Composite has had 11 consecutive positive days, the longest winning streak since 2021. Bond yields are down across the curve, as stagflation concerns get priced out and Fed cuts get priced back in.

These are short trading windows, but as is often the case, the market has moved ahead of the “all clear.” In this case, a resolution between the U.S. and Iran is not guaranteed, but optimism that both sides want to bring an end to the fighting is fueling new highs for equities.

Where Do We Go From Here?

Oil has and likely will continue to be a notable driver of the equity market, and for good reason. The majority of historical U.S. economic recessions have been caused by or associated with a spike in oil prices, and we are still in the midst of a historic disruption in oil supply. In March there were approximately 10 million barrels per day withdrawn from the global market, the largest oil disruption in history^[1]. Ramping up full transit capacity of the Strait of Hormuz could take time, and production facilities that have been taken offline generally cannot be restarted with the flip of a switch—even before considering damage inflicted from attacks.

So, has the market gotten ahead of itself? We do not think so.

Fortunately, the inflation-adjusted price of oil has been below what caused prior recessions (Figure 1). Oil for delivery later this year is being priced much lower than today’s prices, though not back to pre-strike levels^[2], which would mean a return to reasonable energy prices in a few months.

Figure 1: Moderate Spike in Oil, After Adjusting for Inflation

Inflation-adjusted West Texas Intermediate Oil Price and Historical Shocks ($/bbl in 2025$)

^{Source: Department of Energy, Federal Reserve Bank of St. Louis, Wilmington Trust. As of April 13, 2026.}

The labor market is showing signs of reacceleration. Headline inflation has increased with oil prices, but the pass-through to core inflation is in check. We continue to believe that core inflation will inch lower into the end of the year as companies lack the pricing power to pass through price increases to a more discerning consumer. This means the Fed is likely to cut rates by three times this year, providing some support to consumers and businesses.

The most constructive element of the market are the fundamentals themselves. Despite an equity market that has essentially treaded water since October, earnings estimates for 2026 and 2027 have been revised up 19% and 21%, respectively since the start of the year^[3]. As a result, the price-to-earnings ratio based on 12-month forward earnings expectations on the S&P 500 has declined 15% lower in about 3 months (Figure 2), taking it from the 90^th percentile based on the last 10 years to just the 62^nd.

These upward revisions to earnings have been largely driven by AI-related names including semiconductors, but earnings growth for sectors outside of technology are also expected to be in the mid-to-high single digits, which we think is very solid for a moderately growing economy. Assuming these estimates are not wildly optimistic, the valuations for U.S. large cap equities, and growth stocks in particular, are looking compelling.

Figure 2: Strong Earnings Revisions and Sideways Price Action Have Improved Valuation

S&P 500 12-Month-Forward Price-to-Earnings Ratio and 2026 Consensus Earnings Estimate

^{Source: Bloomberg. As of April 15, 2026.}

Where Are We Still Cautious?

We have held a full allocation to equities since 2025, resisting the urge to adjust asset allocation in the face of something as inherently unpredictable as a war. That has proven to be the right move so far, and the market has now broken through some key technical levels that suggest momentum could continue.

There are reasons to be cautious. Most obviously and as mentioned earlier, the situation in Iran remains unpredictable. Negotiations could fall apart at any moment, resulting in a return to a hot war. Even if talks continue, production could remain shut in for longer than the market is expecting, and oil prices could drift higher.

Consumers are also in a somewhat fragile state. The labor market is improving, but labor supply constraints mean job creation is unlikely to be a robust engine for economic growth. We project just 1.1% GDP growth in 2026. The University of Michigan Consumer Confidence Survey hit an all-time low in March^[4], as the war seems to be adding to price fatigue from the accumulated weight of years of above-target inflation[5]. The relationship between consumer confidence and spending has broken down post-COVID, but we cannot rule out that consumers may be more sensitive to gasoline prices, which could mean shifting more spending away from discretionary goods and services even if oil does not move higher from here.   

Core Narrative

Absent a return to military conflict in Iran, we think markets will take their cues from earnings season and continue to move higher. Given the cross currents at play, we maintain a neutral allocation to equities versus our strategic benchmark. We expect leadership to remain with U.S. equities over non-U.S., benefitting from a resumption of tech leadership, strong earnings, and a more insulated economy. U.S. small cap could benefit if our projections for rate cuts is accurate.

Diversification remains important. We have seen how quickly leadership can change, and non-U.S. equities were exhibiting considerable outperformance coming into 2026. The U.S. dollar is also a critical but unpredictable swing factor, which can tilt the balance between U.S. and non-U.S. equities.

^{[1] Source: IEA Oil Market Report – April 14, 2026}

^{[2] Source: Bloomberg. As of April 15, 2026 Brent Crude oil futures for October delivery were trading at $84/bbl, compared to $95/bbl for the active contract.}

^{[3] As of April 15, 2026. Source: Bloomberg. References consensus earnings estimates for the S&P 500 Index.}

^{[4] Source: Bloomberg, University of Michigan. Data goes back to January 1978.}

^{[5] Refers to the Federal Reserve’s 2% inflation target.}

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