New stock market highs backed by earnings
And yet, not only have US stock markets recouped losses incurred at the start of the conflict, but they have gone on to set multiple new highs. Importantly, so too have trailing earnings. This suggests the strong market performance is backed up by fundamentals. While Big Tech have been the headline-grabbers—Amazon, Meta, Microsoft and Alphabet all posted strong revenue and earnings growth on 29 April—the earnings beats seen have been broadbased. As at 1 May 2026, almost two thirds (63%) of companies in the main US market had posted Q1 earnings reports, according to FactSet. Of these, 84% had reported a positive earnings surprise, while 81% had delivered a positive revenue surprise. Furthermore, the data provider estimates a blended year-over-year earnings growth rate for the main US stock market of +27.1% for Q1 2026 which, if hit, would be the highest rate achieved since Q4 2021 (32.0%).
Together with higher estimates from China, Japan, Emerging Markets and Pacific ex Japan countries, the overall earnings picture for the global index has improved too. The exceptions have been Europe ex UK and the UK.
Starting to show up in the data?
Of course, Q1 only covered one month of the conflict and with no immediate prospect of the strait reopening, it remains to be seen what impact persistently elevated oil and gas prices will have on corporate earnings in future reporting seasons. For the longer oil prices remain elevated, the greater the negative impact on the global economy via an inflationary shock and a negative hit to growth.
The first signs of the war’s inflationary impact are starting to be seen in the data, with the UK consumer price index (CPI) rising to 3.3% y/y (year-on-year) in March compared to 3.0% in February. The Eurozone equivalent rose to 2.5% from 1.9% and US CPI jumped to 3.3% from 2.4%. While these figures cover just one month and ordinarily tend to be volatile and subject to base level effects, it is clear price pressures are starting to feed through.
The same could be said in terms of activity levels. True, the headline data has so far largely not shown clear adverse effects from the war. Recent composite purchasing managers’ index (PMI) output readings, for example, were steady for most major economies but it seems this was partly due to companies building up inventories in anticipation of future cost increases and disruption. In other words, demand has been pulled forward. The data also showed a sharp rise in input prices, suggesting higher output prices and lower demand will follow in the months to come.
It’s 2026, not 2022
Still, it is worth noting that the current environment is different to 2022 when Russia’s invasion of Ukraine coincided with a collective post-Covid release of pent-up demand and triggered soaring inflation rates across the world. This can be seen in the figures—the latest UK CPI reading of 3.3% is around half the 6.2% level hit in February 2022. Current central bank base rates are also at far more normal levels — current Bank of England (BoE) rate of 3.75% vs 0.5% in February 2022; Federal Reserve (Fed) 3.50%-3.75% currently vs 0.0%-0.25%; and European Central Bank (ECB) 2.0%
Hikes not cuts
Before the start of the conflict, the BoE had been expecting inflation to fall to around its 2% target in April and derivatives markets were pricing two rate cuts this year. Now, two-to-three increases are being priced in. Similarly, markets are suggesting the ECB will raise rates twice. For now, the Fed is an outlier with rates expected to be kept within the 3.5%-3.75% range, a nod to the US economy being less exposed to the global inflationary shock thanks to it being energy independent. The expectation that Kevin Warsh, the nominee to replace chair Jay Powell, will be more inclined to lower rates than his predecessor is likely to have also helped.
Conflicted bonds
Government bond markets have been caught between expectations for a rise in inflation/interest rates on the one hand and lower growth on the other. Overall, yields have ticked modestly higher, suggesting concerns over inflation rather than growth have weighed on sentiment more. UK gilts have had domestic politics to consider too. Questions over Peter Mandelson’s appointment as US Ambassador continue to threaten to overwhelm Sir Keir Starmer’s premiership. The worry is should the Starmer government fall it could be replaced by one that is less market friendly.
The political uncertainty along with the UK’s high exposure to an energy price shock has seen the 10-year UK gilt yield move above the 5% level. As with the previous month, short-dated bonds outperformed with gilts 0-5yr marginally higher (+0.3%) while gilts 15yr+ lost ground (-1.8%). Overall, the gilt market ended the month 0.5% lower.
Conclusion
Record-breaking equites; weak government bonds: the diverging response to the conflict from the two mainstream asset classes can be explained by their different points of focus. Stock markets have benefited from a positive Q1 earnings season and renewed enthusiasm for the AI trade; government bond markets have had little to distract them from ongoing concerns over the inflationary and growth impacts of the conflict.
The benefits of holding diversified portfolios have been in evidence during the conflict courtesy of global stock markets’ outperformance. However, corrections to equity markets would be expected should the oil price stay elevated and growth materially damaged. If that were to happen, then it would likely be the turn of bond markets to become the standard-bearer of diversification and rally on lower growth concerns, thereby helping to cushion any overall impact. We therefore continue to believe staying invested, maintaining a long-term horizon and holding portfolios diversified at asset class, sector and geographic levels is the better investment approach through time.
