Market Matters – Markets Get Ahead of Themselves

1. Markets have likely run ahead of the geopolitical reality

• The April rebound increasingly priced a smooth de-escalation scenario, but renewed disruption in the Strait of Hormuz highlights that the path to resolution remains uneven.
• Risk assets appear to have moved beyond a relief rally toward pricing a “muddle-through” outcome, which now looks vulnerable to short-term setbacks.

2. Broadening participation supports the rally—but positioning has played a role

• The recovery has extended beyond US leadership, with Asia ex-Japan, EM, Japan and Europe all contributing.
• While fundamentals (earnings, oil moderation) have supported the move, the speed and breadth suggest prior defensive positioning unwinds were a meaningful driver.

3. Equities vs bonds divergence reflects inflation uncertainty

• Equities are discounting de-escalation and earnings resilience, whereas fixed income remains more cautious on second-round inflation effects.
• The key risk is persistence: energy disruption feeding into transport, food and services inflation, delaying the normalisation of rates expectations.

4. Earnings and structural growth themes provide a credible anchor

• Early US earnings—particularly banks—have validated market optimism, signalling stable credit conditions and ongoing economic resilience.
• Technology (notably AI infrastructure demand, reinforced by strong semiconductor data) remains a key structural support for equity markets beyond geopolitics.

5. Regional dispersion remains material; macro backdrop still asymmetric

• Asia and EM have led the rebound on valuation and earnings support; the US remains structurally robust.
• Europe remains more exposed to energy and growth fragility, while the UK faces a deteriorating outlook despite a firmer starting point.
• Near-term direction will be driven by the interaction between earnings delivery and oil/geopolitical developments, with markets now more sensitive to disappointment.