ClockWise: Focus turns to earnings, while Middle East risk persists

Global equity markets have staged a remarkable recovery over the past month, with the MSCI ACWI index rising by around 11% in local currency terms from its March low to a new all‑time high.

Equity markets are trying to look through the Middle East risks, for now – but will that resilience continue?

The initial relief rally was sparked by a more optimistic rhetoric from US and Iranian leaders as well as the subsequent ceasefire announcement in early April but has continued despite limited tangible progress in diplomatic efforts between the two sides since then (Chart 1). Equity markets are trying to look through the Middle East risks, for now – but will that resilience continue?

Chart 1: Investor sentiment no longer depressed

Source: RLAM, Datastream, Smart Insider as at 24 April 2026

The risk is that complacency is setting in before the stagflationary impact from higher energy prices has fully fed through the global economy.

After maintaining a cautious stance through much of March, we shifted to a modestly positive view on equity risk in early April as our proprietary measure of investor sentiment started to recover from deeply oversold levels. This improvement was supported by easing volatility and increased buying from US company directors, amid retail investors remaining overly pessimistic. Following corporate insiders and fading retail investor pessimism has historically offered attractive ‘buy the dip’ opportunities. However, with sentiment now back in positive territory and equity markets trading at new highs, while geopolitical risks remain unresolved (most notably with the Strait of Hormuz still closed), we believe markets may be getting ahead of themselves. The risk is that complacency is setting in before the stagflationary impact from higher energy prices has fully fed through the global economy. With US military assets still deployed in the region, and markets no longer pressuring Trump towards peace, neither a prolonged disruption to global energy supply nor a resumption of a ‘hot war’ can be ruled out. Against this backdrop, we have scaled back our view on global equities to a more neutral stance again at current higher price levels.

Renewed AI enthusiasm drives regional winners

Much of the second leg in the equity recovery after the initial relief rally has been powered by renewed enthusiasm around artificial intelligence (AI). This theme continues to dominate market leadership, with emerging markets – particularly Korea and Taiwan – alongside the US, leading the rally (Chart 2).

Chart 2: EM and US equities have led the rebound over April

Source: RLAM, Bloomberg as at 29 April 2026. Total returns of regional equity futures in local currency terms. Asia Pacific refers to a 70/30% blend of Australia/Hong Kong.

The rally has been underpinned by robust earnings delivery. Around 84% of S&P 500 companies have beaten expectations so far this earnings season, with blended year‑on‑year earnings growth running at more than 15%. The information technology sector, semiconductor stocks in particular, has been the primary contributors behind this strong delivery. The Philadelphia Stock Exchange Semiconductor Index, which includes AI heavyweights such as Nvidia, Broadcom, Intel, TSMC and AMD, has risen for 18 consecutive days to 24 April, delivering gains of around 47% over that period. This rally in semiconductors has helped the wider technology sector bounce back strongly after a horrid performance in Q4 2025 and Q1 2026 amid concerns that the emergence of new AI models could disrupt established software business models. As earnings have instead proven resilient, market focus has returned to those areas with the strongest and most visible growth prospects. Reflecting this backdrop, we hold a positive view on US and emerging market equities that are direct beneficiaries of AI‑related capital expenditure and continue to prefer these markets to more energy‑sensitive regions such as Europe, which have so far lagged the equity market recovery.

Energy equities have repriced lower despite elevated oil prices

As equity markets have recovered on hopes that the Middle East conflict may be resolved soon, the US energy sector has given back around half of its year‑to‑date relative gains against an equally weighted basket of S&P 500 sectors (Chart 3). This has occurred despite oil prices remaining close to $100 per barrel.

Chart 3: Energy sector has given back half of relative YTD gains

Source: Datastream as at 28 April 2026.

At these more attractive levels, we view the energy sector – alongside exposure to broad commodities – as a good hedge within balanced portfolios, particularly against scenarios involving ongoing supply disruption or renewed inflationary pressure. This ‘barbell’ approach of selective exposure to equities with more resilient earnings characteristics, including US technology and emerging markets, combined with exposure to assets likely to benefit from higher energy prices can help balance participation in upside scenarios with protection against a renewed shock.

Monitoring the situation

As we highlighted in our previous ClockWise blog, market behaviour in the initial outbreak of the war was consistent with the Stagflation quadrant of the business cycle, with equities and bonds selling off while commodity prices surged. Our current base case is a muddle-through outcome, where energy prices either remain elevated or trade modestly higher, while pockets of equity markets continue to advance on the back of strong corporate earnings growth – particularly from AI ‘pick-and-shovel makers’. However, risks to this view remain elevated, which is why thinking about various alternative scenarios is important.

A renewed escalation or prolonged supply disruption that sees energy prices spike materially higher from here would likely reinforce Stagflation risk, where an equity bear market cannot be ruled out.

A renewed escalation or prolonged supply disruption that sees energy prices spike materially higher from here would likely reinforce Stagflation risk, where an equity bear market cannot be ruled out. In our view, broad diversification and active management remain key in the current environment.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.