Market overview
Another week, another dose of ‘on-off’ news flow coming out of the Middle East conflict. At the beginning of the week, the war was very much ‘on’. The US had launched Operation Project Freedom, its latest effort to enable merchant ships to pass safely through the Strait of Hormuz. Iran threatened to retaliate and oil prices traded at the higher end of the range seen so far during the conflict. Fast forward to the end of the week, Operation Project Freedom had been put on hold. Iran was considering another peace plan and oil prices had fallen back towards US$100. War in ‘off’ mode once more. But not for long. Iran put forward a counterproposal during the weekend which US President Trump dismissed as totally unacceptable. Back to where we started then with the war in ‘on’ mode.
A faulty on-off switch
Press the ‘on-off’ switch on a TV remote too many times and chances are it will eventually break. Is the same true with the Middle East conflict— a case of too much ‘on-off’ news flow desensitising markets? For even though there appears to be no end in sight to the conflict with all the negative implications this has for inflation and economic growth around the world, global stock markets continued to advance. US markets went on to set new all-time highs which begs the question, if stock markets are becoming desensitised to news flow surrounding the war, what is taking its place?
Changing narratives
Markets like a narrative and there are currently two doing the rounds: a strong corporate earnings season and the artificial intelligence (AI) trade. On the former, 89% of companies on the main market had reported by 8 May. Of these, 84% had beaten earnings expectations and 80% had reported better-than-expected revenues, according to FactSet. And it is not just the percentage of forecast-busting companies that catches the eye, so too the level of the aggregate earnings beat. FactSet estimates a blended (year-over-year) earnings growth rate for the main US stock market of +27.7% for Q1 2026, an increase on the 27.1% the data provider had estimated the previous week. If hit, 27.7% would be the highest earnings growth rate since Q4 2021 (+32.0%) and more than double the +13.1% pencilled in on 31 March.
The earnings season also serves to highlight how the AI-trade has wrestled the narrative away from the conflict. An analysis of topics covered during the earnings calls of the US$10bn+ companies that have reported shows almost two-thirds have mentioned AI. That’s almost double those companies that have talked about the Middle East conflict. The data, which featured in the Financial Times, came from AlphaSense. AlphaSense? According to the company’s website, AlphaSense is an AI platform. Of course it is.
Weekly market moves:
The MSCI All Country World Index (MSCI ACWI) ended the week up 2.4% so that the year-to-date (YTD) gain now stands at 9.7%.
United States:
US stocks matched the global index’s rise point for point after the main benchmark ended the week 2.4% higher (+8.5% YTD), a sixth consecutive week of gains. Once again, technology stocks set the pace, enabling growth (+2.9%) to outperform value (+1.3%) and small caps (+1.7%). Still a way to go before growth catches up on a YTD basis—growth is up +4.6% compared to value’s +11.7% and small caps’ +15.8%.
In contrast to equities, US Treasuries were largely unchanged: the yield on the 10-year Treasury was just one basis point lower at 4.36% (up 19 basis points YTD); while the 2-year Treasury yield moved by the same amount but in the opposite direction, rising one basis point to 3.89% (up 41 basis points YTD). The flat US Treasury performance could reflect mixed economic data. April’s non-farm payrolls rose for a second month in a row. 115,000 new jobs were added during the month, almost double the 62,000 forecast. March’s figure was also raised to 185,000 from 178,000 so that March-April represents the strongest two-month performance since 2024. The University of Michigan’s consumer sentiment index on the other hand posted its lowest reading on record. Around a third of participants cited higher fuel prices and another 30% tariffs as reasons to be gloomy. Not the best news for Trump ahead of November’s mid-term elections.
United Kingdom:
UK large caps underperformed their global peers, finishing the week 1.2% lower (+4.4% YTD). Domestic politics, specifically growing calls for Sir Keir Starmer to resign the premiership following Labour’s poor showing in the local elections, can’t be blamed entirely here. That’s because the more domestically focused mid-caps closed 1.5% higher (+3.0% YTD). A lack of meaningful exposure to the AI-trade as well as a heavy weighting to mining stocks and other areas of the market that are exposed to conflict-induced supply chain disruption have likely combined to hold UK large caps back.
UK gilts performed well, especially against the backdrop of Labour’s poor election results. The yield on the 10-year UK gilt edged five basis points lower to 4.91% (up 44 basis points YTD), suggesting a domestic politics premium is already baked into prices. Starmer is not out of the woods yet. A growing number of Labour MPs publicly calling for him to step down points to yet another crucial week for the Prime Minister. Sterling wasn’t fussed though, ending the week unchanged at US$1.36.
Europe ex UK:
The MSCI Europe ex-UK Index closed up 0.8% (+4.2% YTD)—all the more impressive given Trump’s threat to impose higher tariffs on the EU if levies on the US are not removed by 4 July. As with elsewhere, strong corporate earnings helped offset the geopolitics. At the national level, Italy’s main stock market was the standout thanks to a 2.2% rise (+10.8% YTD); France closed up 0.4% (+0.7%); Germany could only muster a 0.2% gain; while Switzerland ended 0.2% lower (+1.4% YTD). The euro strengthened against the US dollar to US$1.18 from US$1.17 previously. The 10-year German bund yield edged four basis points lower to 3.00% (up 15 basis points YTD).
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