Market Trends | April edition

For investors, the single most important variable of the conflict in the Middle East is duration. How long energy flows remain disrupted — and whether that disruption meaningfully feeds into inflation and global growth — will largely determine the significance of the conflict for the financial markets.

As seen in the chart below, market participants are accustomed to fading geopolitical shocks. That’s because most of these shocks have been short-lived and don’t materially alter global supply chains, and the transmission mechanism to growth and inflation is muted. But the potential difference with the current conflict is that it touches a critical energy chokepoint — the Strait of Hormuz. If disruption to the world’s oil supply is brief, the impact will largely prove to be a volatility event. If it persists for months, it may become a macro event.

For now, we expect oil prices to remain volatile as it appears oil supply will be disrupted for weeks and months, not days. The magnitude of current disruptions suggests it may take time for prices to return toward the 2025 average of roughly $65 per barrel for West Texas Intermediate (WTI). Both WTI and Brent crude prices have risen more than 40% since the hostilities began, prompting market participants to raise their 2026 average price forecasts for oil.¹

Against this backdrop, the S&P 500 has fallen about 6% from the all-time high reached in January.² For now, we still maintain a “risk on" view for the following reasons:

• Earnings outlook: S&P 500 earnings are expected to rise about 12% in 2026 and 10% in 2027. We anticipate AI will remain a driver of strength with EPS growth of 31% expected for tech. Earnings across every single sector are expected to rise in 2026 and 2027!³
• Consumer support: The IRS reports that total tax refunds are more than 10% higher than during the same period last year.⁴ While higher oil prices could weigh on spending in the near term, larger refunds may help cushion the impact.
• Low unemployment: Despite slower job growth, signs of firing remain limited. The unemployment rate is 4.4%, and initial jobless claims have averaged 213,000 in 2026 — well below the 30-year average of over 300,000.⁵
• Policy support: We believe the Fed has both the willingness and the ability to cut rates if there is an immediate shock to growth. Going into the mid-term election, fiscal policy also has room to provide expansionary support, especially if affordability continues to be a risk.
• Structural resilience: Structural shifts have made the U.S. economy less vulnerable to oil shocks. The U.S. has been a net energy exporter since 2019, which may help reduce exposure to external price spikes.⁶ In addition, the economy has become less energy intensive over recent decades.

For an economy to be in stagflation, stagnation (slow or no growth) and rising inflation must both occur at the same time.

Our economics team has raised expectations for headline inflation — a direct consequence of higher oil prices. However, estimates for both core inflation and fourth-quarter real GDP are close to unchanged from the start of the year. Moreover, the estimates for growth are at a healthy 2.4% — very far from “stagnation” levels.⁸

Directionally we may have higher inflation and lower growth from where we were a month ago — but that doesn’t mean stagflation is here. For now, we believe “stagflation” fears are overblown, especially in the U.S., but if energy prices sustain meaningfully higher levels or go higher from here due to further escalation or disruption, then stagflation could occur.

Looking abroad, many countries that are large energy importers may feel a much more acute shock than the U.S., a net energy exporter. If oil prices stay at $100 or move higher through the course of the second quarter, that could certainly become a bigger risk, especially for energy importers.

Another potential advantage for the U.S. economy: The Fed has a dual mandate focusing on the labor market and inflation, unlike many other major central banks that only focus on inflation when determining policy rates.

While headline inflation has the potential to move higher, even temporarily, it is coming at a time when the labor market has been slowing down (chart below).

Short-term inflation volatility has led the market to expect fewer cuts this year, though it’s important to note the market is not expecting any prolonged uptick in inflation expectations: The 5-year breakeven inflation rate, the Fed’s favored measure, is unchanged since the start of the hostilities.⁹

Our expectation is that recent data (weaker payroll print and benign CPI) may move the Fed to a dovish direction over the course of 2026, but we acknowledge dual risks to their mandate. We still believe a 0.25% rate cut is appropriate for 2026.

Read our latest views on the outlook for international stocks