Markets rebound as geopolitical shocks follow a familiar script

Global equity markets have staged a sharp rebound in recent weeks, delivering their strongest monthly performance in several years. The S&P 500 rose 10.5% in total return terms in April, its best month since November 2020. Additionally, despite persistent pessimism around Europe, the Stoxx 600 gained almost 6%, its strongest month since January 2025, while the MSCI Emerging Markets Index soared 15%, its best performance since November 2022.

While perhaps surprising, this rally has closely followed the historical playbook for markets after a geopolitical shock. Over the past several decades, U.S. equities have posted an average peak-to-trough drawdown of roughly 7%, bottoming around three weeks after a shock, then recovering over the next three to four weeks. This episode has tracked that pattern closely: the S&P 500 recorded a drawdown of just under 8%, bottomed just under four weeks after the conflict began on February 27, then recovered within another three weeks.

That markets have adhered so closely to historical precedent, despite the most severe oil supply disruption on record, is striking. At face value, record U.S. equity prices alongside oil above $100 per barrel may appear incongruous. Yet the combination of resilient macro fundamentals, a strong start to the Q1 earnings season, and powerful structural tailwinds, such as the AI investment cycle has sustained investors’ risk appetite.

Macro: U.S. labor market data appear to have stabilized. Jobless claims remain low, ADP employment has rebounded, and March payroll growth was the strongest in 15 months. Consumer spending remains resilient, while PMI surveys point to a recent firming in activity.

Earnings: Results are materially outperforming expectations. Around 80% of S&P 500 companies that have reported have beaten EPS estimates, with strength evident across multiple sectors. On the conflict, corporate commentary has generally been characterized by caution rather than deterioration, with most firms reporting limited near‑term impact.

AI investment: Equity gains have been led by a renewed surge in technology shares as AI enthusiasm re‑accelerates. The Philadelphia Semiconductor Index rose 38% in April, its strongest monthly performance since February 2000. Recent results from mega‑cap hyperscalers have driven a further upgrade in consensus capex expectations and are likely to extend market momentum.

Despite this support, markets sit at a fragile juncture. Current pricing implies a relatively swift resolution to the Iranian conflict, yet key energy dynamics point in the opposite direction. Oil flows through critical transit routes remain impaired, prices have decisively pushed above $100 per barrel, and tighter supply is already weighing on financial conditions, particularly in energy-importing regions.

While the rally has held, its durability will depend on whether tensions ease enough to normalize energy flows and prevent second-round inflation effects. Until then, dispersion across regions and sectors is widening, reinforcing the case for disciplined, diversified positioning.

United States: insulation and earnings visibility

The U.S. continues to display the greatest resilience. As a net energy producer, it is materially less exposed to supply disruptions than other regions, limiting the risk of outright shortages. Of course, higher fuel prices still act as a tax on consumers, but the macro transmission is more muted.

This resilience is reinforced by strong household and corporate balance sheets, alongside supportive fiscal and monetary dynamics:

Balance sheets: Since the pandemic, U.S. household net worth has risen by roughly $70 trillion, providing a substantial buffer against shocks. For corporates, margins remain well above pre‑crisis levels, liquidity is ample, leverage is contained, and balance sheets are far better positioned than in prior cycles.

Fiscal policy: OBBBA tax refunds have arrived at a critical juncture, partially offsetting the drag from higher energy prices. If oil prices stabilize near $90 per barrel, refunds should broadly cushion consumption. However, under a more adverse scenario in which oil settles closer to $125 and transit disruptions persist, fiscal support would be insufficient, and the hit to demand would rise materially.

Federal Reserve: The Fed’s dual mandate affords greater tolerance of inflation driven by energy prices. While rate cuts are likely to be delayed, policy tightening is not currently under consideration.

The U.S. is not immune to higher energy prices, but underlying economic strength suggests any equity drawdowns should remain contained. Energy insulation, fiscal buffers, and leadership in AI investment continue to support relative outperformance.

Europe: energy sensitivity, but better prepared

Europe remains more vulnerable as a net energy importer, with elevated oil prices compounding already weak growth. The risk of a stagflationary impulse is non‑trivial if disruptions persist. Recent PMI surveys suggest surging input costs, while the composite activity has slipped back into contraction territory. With its singular focus on price stability, the ECB has limited tolerance for inflation surprises, raising the risk of near‑term tightening.

However, several factors limit downside risks:

ECB policy: Even two rate hikes this year would only take policy rates to the upper end of neutral territory, not into restrictive territory. This preserves policy optionality, signaling inflation discipline without materially undermining growth.

Structural preparedness: Europe is far better positioned for an energy crisis than it was ahead of the 2022 oil price shock. Supply is more diversified, storage levels are higher, and policy frameworks are more proactive. While operational disruptions, notably in transport, highlight ongoing fragilities, tail risks have declined sharply.

Government measures: Temporary fiscal interventions, including tax relief and price caps, are dampening near‑term inflation pass‑through.

Earnings: Corporate guidance during the latest earnings season reflects this improved resilience. Outside of travel and luxury, few firms have flagged material deterioration linked to energy costs, and earnings remain broadly robust.

Asia: acute exposure, active mitigation

Asia faces the most direct exposure to Middle Eastern energy disruptions, with nearly 90% of the oil and gas transiting the Strait of Hormuz destined for the region. Supply constraints, particularly for natural gas, have already triggered power disruptions and industrial interruptions in parts of Asia.

Even so, the macro impact has been less severe than feared. In Korea and Taiwan, strong AI‑related exports have offset commodity pressures, while the region’s long‑term decline in energy intensity has reduced vulnerability relative to past cycles.

Policy responses have been swift, spanning subsidies, price controls, FX intervention, and the deployment of strategic reserves. China is emerging as a stabilizing force amid this backdrop, with strong exports, rising technological competitiveness, and a more diversified energy mix helping to dampen near-term risks. The planned resumption of refined fuel exports from May should further ease regional shortages, particularly in jet fuel and diesel, as domestic demand remains soft.

Beyond near‑term volatility, the conflict between the U.S. and Iran is accelerating several structural investment themes. Energy security has moved higher on policy agendas, directing capital towards domestic production, grid resilience, and alternative energy. Defense spending also continues to rise as geopolitical risk becomes more entrenched, while AI infrastructure investment remains largely uninterrupted.

These overlapping investment cycles suggest that geopolitical shocks, while episodically disruptive, can reinforce medium‑term growth drivers. Such an investment landscape argues against indiscriminate de‑risking and instead supports selective exposure to regions and sectors aligned with these structural shifts.