Weekly Market Recap

Global stocks hit new highs this week. Investors were increasingly willing to look past geopolitical volatility, focusing instead on the strength of corporate earnings and the ongoing AI investment cycle. The Iran-U.S. war continues to dominate the geopolitical backdrop. Oil prices have remained highly reactive to headlines surrounding ceasefire negotiations and the Strait of Hormuz.

Oil prices have fluctuated sharply around the USD100 per barrel level as markets weigh hopes of eventual de-escalation against the risk of prolonged supply disruption.

While negotiations remain complicated and unpredictable, investors still broadly believe both sides have incentives to avoid a sustained closure of the Strait of Hormuz.

Despite elevated oil prices and persistent geopolitical uncertainty, risk sentiment has remained remarkably constructive. A major reason is the continued strength of the AI ecosystem, which is increasingly driving both earnings growth and market leadership.

Recent semiconductor earnings (e.g., Nvidia’s results last week, which sizeably beat earnings expectations) once again reinforced that demand for AI infrastructure remains exceptionally strong. Companies across the ecosystem continue to report rapid revenue growth, strong pricing power and very high profit margins, supported by relentless spending on data centres and computing capacity.

One of the standout developments this week was semiconductor manufacturer Micron reaching a USD1 trillion market capitalisation milestone, highlighting how enthusiasm has broadened beyond just the largest AI chip designers. Memory chips have become one of the clearest beneficiaries of the AI boom, as increasingly sophisticated AI models require enormous amounts of high-bandwidth memory to process and train data efficiently.

Importantly, this is both a demand story and pricing story. Tight supply conditions and surging demand for advanced memory products have driven sharp increases in memory chip prices, leading investors to significantly rerate valuations across parts of the semiconductor sector.

More broadly, markets are becoming increasingly optimistic that the AI investment cycle still has substantial room to run. U.S. hyperscalers continue to commit enormous capital expenditure towards AI infrastructure, reinforcing confidence that this is evolving into a multi-year structural growth theme rather than a short-term technology rally.

For now, that powerful combination of resilient earnings, expanding profit margins and sustained AI spending continues to outweigh concerns around geopolitics and energy volatility.

Markets remain hopeful that tensions in the Middle East will eventually ease and that shipping through the Strait of Hormuz can normalise. In the meantime, AI remains the dominant anchor for investor sentiment.

All eyes are on the UK economy

The UK economy is in focus as it’s at risk from higher energy prices, in turn causing higher interest rates and borrowing costs, while at the same time suffering from a political crisis.

Crucial to this is the outlook for inflation. Last Wednesday’s Consumer Price Index (CPI) release showed headline inflation dropping to 2.8% in April, down from 3.3% in March. Core CPI also moderated to 2.5%, driven largely by downward pressure in housing and household services offsetting a sharp spike in motor fuel costs.

This softer-than-expected reading provides the BoE with some breathing space on interest rates. But it also highlights the cost of the war in the Middle East: without the geopolitical disruption to energy markets, inflation would likely have returned to the 2% target this month.

The reprieve is temporary: the energy price cap is set on a lagging basis and will shift from tailwind to headwind in June and will be felt in July’s bills. Fortunately, for now there’s little evidence of second-round effects where fuel causes higher wage demands. In fact, the labour market seems weak, a far cry from 2022 when the last energy-driven price spike hit.

UK jobs appeared to contract sharply in April

Last Tuesday’s Office for National Statistics release was materially worse than expected. Unemployment ticked up to 5%, but the real alarm was the early estimate of payrolled employees for April, showing a drop of 100,000, far exceeding the roughly 20,000 decline economists had pencilled in, and the largest single-month fall since the start of the pandemic.  

However, these data get heavily revised, particularly at this time of year. Each of the last three years have seen similar estimates of lost jobs, which have proven to be false when revised the following month. Nevertheless, the BoE faces a genuinely difficult balancing act and is now expected to defer interest rate increases until July or September.

Friday’s data showed UK government borrowing reached £24.3 billion in April, significantly exceeding the £20.9 billion forecast and applying further pressure to the national deficit.

Retail sales contracted by 1.3%, heavily concentrated in a striking 10% drop in fuel sales, indicating a clear behavioural shift as consumers actively drive less and dip into savings to manage sustained high energy costs. Consumer confidence slipped further into negative territory.

Thursday’s flash purchasing managers indices confirmed the pattern of divergence: U.S. manufacturing surprised to the upside, signalling resilience in the American industrial sector, while Eurozone indices remained largely in contraction territory. The UK services sector moved into deep contraction, though manufacturing held up.

This combination of softening inflation and strained consumer activity caused a slight recalibration in fixed-income markets. As the data suggested the economy is cooling, investors pared back expectations for prolonged elevated rates. In the UK, gilt yields fell marginally toward the end of the week, with the 10-year dipping to 4.9%.

Coming up – 2 June to 9 June 2026

Gulf sale: 

Attention will remain on whether any of the floating stocks of oil in the Persian Gulf are able to transit the Strait of Hormuz and reach market. U.S. Secretary of State Marco Rubio expressed confidence that a deal can be reached, but such hope has been misplaced in the past.

U.S. consumer confidence: 

As already evident in opinion polls, U.S. consumers are feeling the prick from higher fuel prices, which will likely also be reflected in consumer confidence surveys.

Inflation: 

Early estimates of May’s inflation will be delivered.

The UK was firmly in the spotlight last week as the prospect of a new prime minister looms. Its most pressing challenges have largely been imported, but domestic political pressure, building quietly for months, is now demanding a response.

Local election results confirmed heavy losses for Labour, with Reform and the Greens the main beneficiaries. Polymarket odds of Keir Starmer being replaced by the end of June had risen above 60%.

As for his potential challengers, Wes Streeting has resigned from the cabinet, Angela Rayner confirmed she’s been cleared by tax authorities following an investigation, and Andy Burnham has secured a path to a parliamentary seat, via a by-election he is expected to win. The latter development coincided with a sharp sterling depreciation.

Markets are uneasy about Burnham for identifiable reasons. He has spoken publicly about moving beyond being “in hock to the bond markets” and has described deregulation, privatisation, austerity and Brexit as “the four horsemen of Britain’s apocalypse.” He has also signalled ambitions to recapture public control over housing, energy, water, rail and buses.

However one views these positions, reversing them would require substantial spending and carry execution risk, precisely the combination that makes bond investors nervous. Prediction markets give Burnham a 60% chance of success.

The UK’s first quarter GDP data provided some positive offset, coming in at 0.6% quarter-on-quarter and generally quite strong, with March showing 0.3% growth against expectations of a modest contraction. This suggests UK consumers were able to weather the increase in energy costs during March, probably because UK households raised their savings rates last year to withstand tough economic conditions.

This resilience may reinforce the case for the Bank of England (BoE) to increase rates this year. However, this must be weighed against indications that the housing market is weakening, and survey data suggesting more recent retail sales are likely to be weaker.

The BoE is expected to raise rates at least twice this year, and UK 10-year government gilt yields topped 5.1%, which is higher than 2022 levels. Most of this relates to the prolonged increase in energy costs and impact on inflation, but the political drama is clearly causing some underperformance from UK bonds.

Strait standoff tightens as Trump-Xi talks disappoint

While political drama may be brewing at home, the Iran-U.S. conflict remained the most important issue across markets last week, with hopes of a diplomatic breakthrough fading as the days progressed. Early last week, the lack of progress in nuclear talks between the U.S. and Iran pushed energy prices higher and weighed on European equities.

By mid-week, satellite imagery confirmed that oil shipments from Khargh Island, Iran’s primary export terminal, had dropped to zero for the longest stretch since the conflict began, indicating that available floating storage is running out. If Iran exhausts its remaining capacity, it will be forced to cut production outright, which has been a stated aim of the Trump administration’s blockade of the Strait of Hormuz.

Oil prices climbed roughly 8% over three sessions as the physical market tightened. This fed directly into inflation data. The U.S. producer price index (PPI) rose 1.4% month-on-month in April, the largest monthly gain since March 2022 and far above the 0.5% consensus. The annualised figure hit 6%. While the PPI is inherently more volatile than consumer prices, a miss of this magnitude signals that cost pressures are moving through supply chains.

The Japanese PPI told a similar story, marking its fastest year-on-year rise since 2023, driven by oil and naphtha (a liquid hydrocarbon mixture derived from crude oil or other natural sources, which is often used as a fuel, solvent, and petrochemical feedstock) costs, unsurprising for a country that imports 90% of its crude from the Persian Gulf.

The Donald Trump-Xi Jinping summit in Beijing, which had been a source of cautious optimism, delivered little of substance. President Trump asserted the U.S. does not need the Strait of Hormuz open.

He did discuss progress on achieving trade deals with China, including vague intentions for China to purchase U.S. oil and agricultural products and a commitment for China to buy U.S. aircrafts.

Where specifics were mentioned, they underwhelmed. The one notable development was the clearing of Chinese tech groups to purchase Nvidia’s H200 chips, which gave a brief lift to NASDAQ futures. Nvidia’s Jensen Huang joining the trip at the last minute now appears to have been the main event.

Against this backdrop, U.S. equities continued their remarkable bifurcation. Tech and AI names drove another strong session on Thursday, with Cisco jumping 20% after hours on an upgraded sales outlook. The broader market, however, struggled with the inflation data, treasuries sold off, with the 10-year yield reaching almost 4.5%, and the 20- and 30-year yields both closing above 5%.

The U.S. Senate’s narrow confirmation of Kevin Warsh as the next Federal Reserve (the Fed) Chair (54-45, almost entirely along party lines) adds another variable. His first meeting in June will be closely watched, though he’s unlikely to have sufficient data clarity to support any rate move in that timeframe.

What is notable is that since the nomination process began, market expectations have shifted from rate cuts to rate increases. If the new chair doesn’t manage to cut interest rates, history suggests he might receive criticism from the president.

Inflation: Punchy but not panic-inducing

The U.S. CPI for April showed headline prices accelerating to 3.8% year-on-year, the highest since the post-COVID-19 spike. Core CPI rose 0.4% month-on-month, the first upside surprise in several months. However, the detail was less alarming than the headline.

The jump in shelter costs was largely a statistical quirk from the government shutdown last autumn, which caused a full year of accumulated rent increases to appear in a single month’s data.

Alternative measures of rental inflation, including the Zillow index, continue to decelerate. Core goods inflation showed surprisingly little tariff pass-through, and Bloomberg Economics assessed that the impact from the ‘Liberation Day’ tariffs is now mostly complete.

The areas to watch are food prices, where fertiliser supply disruption through the Strait poses an upside risk, and semiconductor-driven tech inflation, where Samsung has warned of further market tightening next year.

Household inflation expectations have edged up modestly, but not to levels that would alarm the Fed. We expect the new Warsh-led Fed to remain in wait-and-see mode, with neither a bias to hike nor cut.

The Iran-U.S. conflict dominated proceedings once again last week. It began with the fallout from a U.S. operation to force the Strait of Hormuz open by facilitating the transport of tankers with naval escorts. The convoys came under fire and investors were concerned that this would trigger a collapse of the ceasefire, providing a downbeat start to the week.

The operation was halted after a day. By mid-week, President Donald Trump used it as the basis for a reattempt at negotiation. Secretary of State Marco Rubio stated in exceptionally direct terms that “the combat phase is over”, language that was unusually conciliatory.

The Trump administration confirmed it had sent a proposal for the reopening of the Strait of Hormuz to Iran. This triggered a substantial rally even though Iran was initially cool towards the proposed terms, particularly any moratorium on uranium enrichment.

The possibility of a deal saw equities, particularly European equities, rally, with government bond yields falling sharply. But at the beginning of this week, negotiations have only highlighted how far apart each party is.

The broader picture remains one of an energy shock, with compounding implications for Europe, such as:

• elevated gas prices (materially above U.S. levels)
• fiscal constraints, with debt-to-GDP ratios converging on, or exceeding, 100% in several countries
• the additional burden of increased defence spending.

These challenges are connected rather than isolated.

So, when the U.S. and Iran re-engaged in ballistic operations following assaults on U.S. ships, and even as the U.S. awaits a response on its offer, equities have retreated, cyclical sectors have underperformed, and the more defensive corners of the market, including technology, have held up relatively better.

We believe both sides would like to see the Strait reopened, so while there have been several false dawns, eventually one of these potential agreements is likely to take hold.

UK political changes are afoot

Last week also saw the UK hold local elections.

The results showed a remarkable swing from the Labour Party towards Reform. To a substantially smaller extent, the Conservatives and independent councillors lost out to the Liberal Democrats and Green candidates.

The probability of a change in prime minister and the response in gilt markets

Source: Associated Press

The results were not hugely surprising and there was little reaction in the bond market. However, there is now a concern that these poor results could bring about a leadership challenge resulting in the fall of Prime Minister Sir Keir Starmer and, more specifically, Chancellor Rachel Reeves.

Potential candidates could be more inclined to increase spending, leading to more bond issuance and possibly higher inflation.

Prediction markets place approximately a 45% probability on the prime minister departing by the end of June, and a 60% to 70% probability of him departing by year-end, a number that fell when he vowed not to resign but rose once more as signs of rebellion from the party, and even within the cabinet, started to grow.

The gilt market has been concerned about the impact of a new Prime Minister as they may feel compelled to jeopardise fiscal sustainability to meet their political objectives. It seems likely that any future leader will be aware of how important it is to respect the bond market, however, they’ll also need to cope with external factors (such as the U.S.-Iran conflict), which put additional pressure on the government finances.

In recent weeks it’s been made clear that the Persian Gulf war has been the most significant bond market concern.

The U.S. jobs market holds up

In the U.S., frustration continues to grow with the economy.

Polling suggests that attitudes towards the war are fairly static, but attitudes towards the inflation it has created are becoming increasingly uniform.

Earnings reports cited the increasing pressure on the lower income cohorts, but so far, the jobs market is holding up. Job openings have plateaued, and there are still a significant number of people quitting their roles (implying they’ve found better employment elsewhere).

The latest jobless claims data remains subdued. Last month, 100,000+ new jobs were created in the U.S. Jobs growth has been slowing in recent years, but recent months have seen it stronger than anticipated.

The only concern is the increase in the number of job cuts in April, which the monthly Challenger Jobs Report attributed to AI. Jobs growth can slow due to cyclical factors, such as interest rate or gasoline price increases.

However, it can also slow due to structural factors, such as the roll-out of labour replacing technology driven investment.

So far, this is the second consecutive month we have seen AI mentioned as the reason for U.S. jobs cuts. It has been cited as the reason for 49,135 job cuts, about 16% of all job cuts this year. The numbers are very modest, but the trend is one that will be scrutinised.

Last week saw the Iran-U.S. conflict enter its ninth week, and what had been cautious market optimism around a negotiated resolution gave way to a more sober assessment.

Early last week, reports emerged via Axios that Iran had submitted a proposal to reopen the Strait of Hormuz. This would reportedly involve the U.S. lifting its naval blockade, agreeing to a new legal framework for the Strait and deferring nuclear negotiations to a later date.

The U.S. indicated the offer was insufficient, and by mid-week, reports suggested President Donald Trump was being briefed on new military operations and had told aides to prepare for an extended blockade.

Over the weekend, the U.S. began escorting vessels through the Strait, coming under fire in the process. The escort plan was dropped after just one day but has been followed by news of a potential peace plan between the U.S. and Iran. The deal is expected to revolve around a moratorium on uranium enrichment by Iran, sanctions relief by the U.S., and both sides lifting restrictions on transit through the Strait of Hormuz.

These developments were reflected in the oil market. Futures prices are still sloping downward, suggesting that prices are high now but will fall in the future. Spot prices (the cost of buying an actual barrel of physical oil) fell on the latest news but remain elevated, above even the short-term futures prices.

As supplies of crude have been slow to arrive at the refineries, companies have drawn down on inventories of oil products, which have been declining. For example, kerosene inventories in Europe have dropped sharply, leading airlines to cancel flights.

There is growing optimism that these inventories will begin to be replenished through an eventual return of Gulf supplies. If not, the European market will end up buying kerosene and other oil products from other regions, allowing oil to flow through the markets that are prepared to pay the highest price.

For example, a supply decline of 10% would necessitate a 10% reduction in energy consumption, but this may not happen in the regions with the lowest inventories. Therefore, the most obvious implication is the inflationary impact. This was something for policymakers to ponder last week, when all the major central banks were reporting.

Central banks: Hawkish drift and no action

As anticipated, none of the central banks changed their policies last week.

The Federal Reserve (the Fed) held rates at its final meeting under current Chair Jerome Powell. He will almost certainly be replaced as chair by Kevin Warsh, who is in the process of being confirmed by the Senate.

RBC Wealth Management (U.S.)’s Tom Garretson, a senior portfolio strategist specialising in fixed income, points out that there has not been much pushback on Warsh. Blanket statements that he is an ‘impressive’ and ‘outstanding’ candidate who used to be at the Fed have been nearly universal.

Tom questions that appraisal: “The highlight of his entire CV is basically his time at the Fed during the Global Financial Crisis, but his only notable accomplishments were seeking to raise rates when unemployment was still around 8%, and then warning about the potential hyperinflationary impact of quantitative easing, which he ultimately resigned from the Fed over, and which ultimately never occurred.”

Kevin Warsh is President Trump’s selection because the President was frustrated that Jerome Powell’s Fed was not cutting rates fast enough. But now that Warsh is about to arrive, he will find it hard to persuade the Fed to cut given that inflation is on an upward trajectory due to the Iran-U.S. conflict.

It would not be surprising if his relationship with President Trump were to become a tense one from the start.

Elsewhere, the European Central Bank, Bank of Japan (BoJ) and Bank of England (BoE) all held interest rates. However, these are expected to start rising in June.

The key development was a hawkish shift in market pricing. At the start of last week, UK and Eurozone markets were discounting approximately two rate hikes by year-end. By Friday, this had edged towards the possibility of three, reflecting the inflationary impulse from elevated energy prices.

The Bank of England’s Monetary Policy Report laid out three scenarios:

1. energy prices follow the futures curve lower, with no second-round effects, still justifying roughly two rate hikes.
2. prices remain elevated between current levels and the curve, with moderate wage effects.
3. prices rise further with significant second-round effects, implying rates will rise by over one percentage point to 5.25–5.50%.

Even the benign scenario now appears to justify further tightening. This contrasts with comments made by BoE Governor Andrew Bailey over the past month, for example, when he described how the market’s “still pricing us to raise rates… I think they’re getting ahead of themselves.”

Additional anxiety over the direction of interest rates and oil prices was a headwind to markets but the earnings season was a tailwind.

Equity markets adopted a risk-off tone as last week progressed, with European indices falling around 1% on Thursday. U.S. equities bucked that broader move, driven by generally good earnings numbers on Wednesday, when the four hyperscalers of the ‘Magnificent Seven’ mega cap stocks (Microsoft, Meta, Amazon and Alphabet) reported their Q1 earnings.

The results were mixed, with Alphabet’s impressive results seeming to validate the full stack vertically-integrated model (infrastructure, language model, tools and applications). Meta, on the other hand, disappointed due to the costs of investment.

The dollar strengthened gradually, and Japanese government bonds sold off across the curve, with the yen breaching the 160-per-dollar level before an intervention by the BoJ to stabilise it.

Energy importers like Japan have suffered downward pressure on their currencies from the rise in energy costs and resulting higher import costs. Others include Turkey and India, which have also used reserves to attempt to stabilise their currencies.

At the same time, Gulf states that would normally accumulate reserves, especially at times of high energy prices, haven’t done so while their cargoes cannot reach the market.

Taken together, these two groups have reduced the pace of reserve accumulation and, therefore, the structural demand for gold. This creates short-term pressure on the gold price, which will continue until reserve accumulation can return to normal.

Thereafter, the case for holding gold seems as strong as ever. The U.S. runs a large and persistent current account deficit and a deeply negative net international investment position, consuming more than it produces and financing the difference by accepting dollar-denominated loans from the rest of the world.

It’s understandable why other countries would balk at holding the majority of their foreign exchange reserves in dollars, and gold benefits as result.

The geopolitical stand-off between the U.S. and Iran over the Strait of Hormuz dominated market sentiment throughout the week. Oil prices returned to above USD100 per barrel and risk appetite came under pressure.

Last week opened with both sides claiming the Strait was open to traffic, only for Iran to close it again after the U.S. failed to lift its naval blockade. A vessel was seized by the Americans for attempting to violate the restrictions, marking the first such incident.

Talks were scheduled in Islamabad, Pakistan last Tuesday, but Iran initially signalled it had no plans to send negotiators. By midweek, the U.S. had chosen to maintain the blockade while extending the ceasefire without an end date, a pragmatic acknowledgement that setting another deadline it might not enforce would damage credibility.

By Thursday, Iran had formally stated it had no plans to participate in negotiations, pushing Brent crude higher once more.

This led to a fall in anticipation of the reopening of the Strait of Hormuz. At the beginning of the week, there was a 60% chance of the Strait being reopened by the end of May, according to the Polymarket prediction market. By the end of the week, that had fallen to 34%. The implications of a further five weeks of disruption are stark, causing additional tightening in the energy markets.

Notably, while crude oil prices have retraced somewhat from their peaks, the pass-through to consumer fuel prices has been asymmetric, petrol prices at the pump remain stubbornly high despite some easing in wholesale markets. Towards the back end of the week, prices were rising once more.

This is frustrating because there’s growing evidence that the UK economy was picking up before the war began. UK retail sales numbers released for March show that UK consumers have been able to dip into accumulated savings, so the war has not slowed their consumption. 

It will not take long for the effects to be more pronounced as the GfK consumer confidence survey showed consumers are anxious about the economy, and business optimism fell to its lowest level since COVID-19 according to the Confederation of British Industry.

The UK is not alone in this. Global purchasing managers indices (PMIs) showed that businesses are slowing production and raising prices. Most countries are experiencing price increases not seen since the brief window of extraordinary inflation in 2022.

Inflation is bad for political leaders. The decline in President Donald Trump’s net approval rating has started to accelerate.

In the UK, it’s yet another challenge for UK Prime Minister Sir Keir Starmer, in addition to the difficult testimony he gave to Parliament regarding the Peter Mandelson vetting affair, and the even more difficult evidence heard from former civil servant Oly Robbins, who oversaw the process.

The combination of these factors has made gilts the worst-performing major bond market since the onset of the war.

UK inflation data released last week offered few surprises. Inflation has picked up due to energy. The combination of the survey data and PMIs caused expected interest rates to rise from a single increase in 2026 to two hikes for both the UK and Europe.

We are often asked why central banks would increase interest rates when the economy is struggling due to high prices elsewhere. The answer is that if it seems like higher oil-related prices feed through into higher wages, the central bank faces a wage price spiral, which can only be broken by deliberately weakening demand, done by raising interest rates.

In April, the Bank of England’s Decision Makers Panel of firms said it expects firms to raise prices by 4.4% over the next year, and for inflation to reach 4%, double the BoE’s target. 

However, the BoE’s agents, who speak to businesses and gauge how they are feeling about things, learned firms are worried about their ability to pass on price increases, which means they are more likely to ‘absorb’ them (suffer weaker profits). If companies do not pass on the price increases, the BoE will not need to raise interest rates.

Corporate earnings: Strong but facing elevated expectations

Earnings season continues with quite strong numbers overall emerging from businesses.

At a time when valuation multiples have contracted (the S&P 500 12-month forward price-to-earnings ratio has declined from 22.9 to 20.1), corporate earnings have been the engine driving equity markets higher.

With about a quarter of U.S. companies having reported, aggregate earnings are coming in around 10% above expectations, producing a blended year-over-year growth rate of 14.4%. Technology has been the standout, with earnings up 46% year-over-year. 

Corporate balance sheets remain in good shape, with interest coverage for U.S. non-financial businesses at very high levels, leaving ample capacity for continued investment.

Companies tend to beat their short-term earnings estimates by design, they edge down their guidance to reach something achievable. But longer-term expectations are high and must be met in order to justify the current valuations. Several cyclical, sector-specific, and structural factors suggest meeting currently elevated expectations will be challenging.

The boost to the economy from lower bond yields appears to be over. Fiscal policy for advanced economies in 2026 is projected to be neither loose nor tight. U.S. jobs growth has slowed to zero, and historically, every time non-farm payroll growth has dropped to zero or below, corporate earnings have followed. Earnings recessions have occurred roughly once every four years; the last was in 2023, implying one could be due by 2027.

The main anxieties facing company earnings at the moment are around AI-related capital expenditure by hyperscalers, which has boomed. The four major hyperscalers, Microsoft, Meta (Facebook), Amazon and Alphabet (Google), are expected to spend over USD600 billion this year, up from USD200 billion just two years ago. However, there are legitimate questions about what returns they are likely to make on this investment.

The relevant CEOs themselves have acknowledged they’re investing not solely for attractive returns but for survival, a dynamic reminiscent of a prisoner’s dilemma, where mutual investment compresses margins.

So, while this seems very different from the previous tech bubble because these companies are incredibly profitable at the moment, there are some genuine reasons to fear that future profitability could disappoint.

The Middle East conflict remained the focus last week.

Following the breakdown of U.S.-Iran negotiations, last week the U.S. imposed a naval blockade on Iranian ports and coastal areas. This represented a shift in strategy from the previously threatened strikes on domestic Iranian energy infrastructure.

This pivot was reportedly driven by U.S. Central Command’s concerns over the depletion of munitions stocks required to sustain a prolonged bombing campaign.

The blockade’s practical enforcement was tested early in the week, with markets closely watching the passage of the Rich Starry, a Chinese-owned, Malawian-flagged vessel previously blacklisted for sanctions violations, through the Strait of Hormuz. The ship ultimately turned back, suggesting the blockade is, for the time being, holding. Tanker traffic through the Strait has effectively been curtailed.

The geopolitical calculus remains complex. Helima Croft of RBC Capital Markets cautioned against assuming China would pressure Iran toward a deal. She noted that Beijing has amassed significant energy stockpiles and may view the redeployment of U.S. military assets away from Asia, and the running down of American missile inventories, as a net strategic benefit.

On the other hand, the blockade imposes real economic costs to the Chinese energy supply, which doesn’t improve the already strained bilateral relationship between Washington and Beijing.

By mid-week, however, sentiment shifted materially. The President, Donald Trump, indicated that Iran had reached out to resume peace negotiations, with reports suggesting face-to-face talks would occur before the current ceasefire expires next week.

Over the last week, negotiations have continued on a number of official and unofficial fronts. Specific parameters related to Iran’s nuclear programme remain contentious, but as both parties are evidently able to restrict access to the Strait of Hormuz, it becomes harder for either one to use that as leverage.

During the weekend, the Strait appeared to have been reopened by Iran, but it was closed again as the U.S. failed to lift the blockade. These developments serve as a reason for optimism regarding a mutually beneficial agreement potentially being reached this week.

The market reaction to these developments was notably restrained throughout the week. Equity volatility indices fell back to levels consistent with those prevailing before the conflict’s onset, and an increasing number of global indices moved into positive territory relative to the start of hostilities. Brent crude, while still elevated at approximately USD94 per barrel, eased from its highs as the prospect of a diplomatic resolution introduced fresh supply expectations.

There is no question that markets appear complacent considering the significant economic risks that remain. It seems likely that the market reaction has more to do with the continued flow of new funds into markets, driven mainly by employment compensation, than with an appraisal of the earning potential of most companies.

The weekly employment data released, which runs up to 11 April, showed that there has been no discernible increase in job losses since the conflict began. While employment remains reasonably strong, pension contributions will continue to push stocks higher.

Companies that had stopped buybacks ahead of their earnings releases will be able to return to the market once they have reported, which will likely provide additional support for the markets.

The earnings season properly began last week and will step up this week.

U.S. inflation: Accelerating from an elevated base

The main concern for investors has been the risk of inflation. It detracts from growth and increases potential interest rates.

In the U.S., Consumer Price Index (CPI) data for March has shown an acceleration in headline inflation, jumping to 3.3% year-on-year. Unsurprisingly, the primary driver was a spike of over 20% month-on-month in the energy commodity category.

This represents the largest increase in the history of the data series, which extends back to the late 1950s. There were early signs of energy cost pass-through, most visibly in airfares, but critically, there has been no evidence yet of broad-based contagion.

The conflict is not the only factor affecting inflation. AI, for example, is both disinflationary and inflationary. While there is an expectation that AI will suppress ‘white collar’ wages and, thus, services inflation, AI-related demand has driven computer memory prices up over 2,000% in the past year and therefore maintained upward pressure on tech hardware prices.

What will the implications of this be for Federal Reserve (the Fed) policy? Markets are now pricing in the possibility of a single cut in the Fed funds rate through year-end. With inflation accelerating from an already elevated level, and having missed its target for an extended period, the Fed will require clear, sustained evidence of economic weakening before cutting rates.

Expected changes in interest rates this year

Two factors will be decisive.

First, the consumer: spending growth has held up at 2.5% year-on-year, but income growth has weakened to just 1%, pushing the savings rate down to a historically low 4%. Bank of America deposit data reveals a stark K-shaped divergence, higher earners are seeing wage growth near 6%, while lower earners are at approximately 1%.

Given that lower income households have a higher marginal propensity to spend, this divergence represents a meaningful risk to the consumption outlook.

Second, inflation expectations: market-based measures, such as five-year forward expectations, remain well-anchored, and survey-based measures show only a modest uptick – nothing alarming thus far.

UK: Growth remains resilient, but headwinds are gathering

UK monthly GDP data for February came in surprisingly strong at 0.5% month-on-month, reflecting an improvement in household confidence following the widely feared autumn Budget.

However, this pace is not considered sustainable, and the data pre-dates the onset of the Middle East conflict. Purchasing Managers Indices (PMI) readings have already softened, and elevated energy costs are expected to take the sting out of the year’s strong start.

The government announced a £600 million package of deferred costs for manufacturing businesses to help manage higher input cost inflation, a modest but directionally positive measure.

UK wage growth remains stubbornly above levels consistent with the Bank of England’s 2% target, effectively ruling out near-term rate cuts. Markets now expect one to two rate hikes by year-end, and gilt yields have risen accordingly. Sterling has maintained a firm footing near USD1.35, supported by the expectation of sustained higher rates.

Political risk has also entered the frame. The revelation that former U.S. ambassador Peter Mandelson failed the vetting process has placed additional pressure on Prime Minister Sir Keir Starmer. 

Prediction markets are now seeing the probability of Sir Keir’s departure by year-end jump from approximately 40% to 55–60%. This uncertainty contributed to gilts underperforming other European sovereign bonds.