Why have stocks gone up?

The ceasefire has been extended (again), but the situation seems as fluid and potentially volatile as ever. Genuine insight and perspective is elusive. Bizarre statements are made, over-analysed by a hapless media, and then reversed (and re-analysed). Yet the MSCI global stock index has more than made good its losses, and has been hitting new highs.

How can stocks seem so exuberant with this dreadful conflict still unresolved, and the human cost so high and still rising?

We have offered our answer often, but the question remains pressing, and it bears repeating: it's because capital markets are impersonal, and often "look across the valley", focusing not on current risks but on a longer-term outlook.

That longer-term investment outlook may not have changed materially since before the conflict. Indeed, it may not have deteriorated at all, and it is not beyond possibility that it may even have improved (again, remember that we are talking here of narrow, financial matters only).

Remember, there are many, many moving parts in the global economy and capital markets, and they are not all – or even mostly – geopolitical in nature. Some of them have been evolving independently of the conflict; others have been less affected by it than seemed likely in March.

Business surveys and hard data relating to the period before the conflict looked solid, and those covering the period are not suggesting (yet) a dramatic downturn. US retail spending was remarkably firm in March (and not just because of higher gas prices); weekly jobless claims have stayed low well into April. Germany's widely-watched ifo survey remained firm in March. China's GDP growth accelerated in Q1; even UK GDP data recently beat expectations (albeit for February).

For sure, the IMF has cut its 2026 and 2027 GDP forecasts, as have private-sector economists. The reductions to date are mostly small however.

In one respect, near-term activity estimates have actually improved. Expectations for corporate earnings have risen – and again, not just in the oil sector. Technology sector profits – in and around the semiconductor sub-sector in particular – seem to have been growing significantly more strongly than previously thought (directly triggering some of that stock market rebound), and capital spending by the sector (whatever our misgivings about its ultimate profitability) seems still to be surging.

For sure, inflation rates – and interest rate expectations – have deteriorated (risen), and for the former at least there is more (literally) in the pipeline.

That said, the increase in oil prices, as we write, appears manageable: at roughly $70pb before the conflict, Brent crude at one point hit $120pb, and is trading currently at $103pb. This is still a big increase (pushing one-half), and the lasting effects of destroyed/closed infrastructure have yet to be felt. But throughout, futures markets have suggested a spike, not a plateau, in prices.

Suggestions that this is the biggest energy crisis ever look premature – or may reflect the absolute amount of disruption: the global economy is much larger today than in the 'seventies. A loss – or interruption – of around one-tenth of oil-based supply is material, but the dislocations which followed the 1973 hike were of a different order of magnitude and (hopefully) duration. Meanwhile, stockpiles and altered transit routes can offer workarounds for a while.

Of course, not all regions – or products – are being affected equally. Localised shortages of crude, and of refined products, are hitting hard in Asia, and might emerge in the West, where the "cost of living crisis" is still driving much political debate (despite real wages having more than reversed 2022's setback).

As for those higher interest rate expectations, we suspect that the big central banks may not be quite as hawkish on this count as the money markets initially suggested (and the markets have now moderated their views somewhat). Even if they are, we started the year thinking that there wasn't as much room for rates to fall as the markets implied then, albeit for other, more routine, reasons (namely, ongoing economic resilience).

So far, then, the narrowly economic impact of the conflict is likely material, but perhaps not game-changing. And looking further ahead – across the valley – what matters most in the investment context is not the reputational "wins" and "losses" being debated by the armchair generals, but the stability of the wider world and its energy supplies in the longer-term.

In this regard, the jury is surely still out. Received wisdom takes it for granted that things will worsen, but that need not turn out to be the case. Energy supplies, and their reliability, may not always be this precarious – and market forces have a habit of effecting change even without coordinated political action.

Stocks did not suddenly become cheap, and much Artificial Intelligence is still an answer seeking a convincing commercial question. Interest rates can disappoint even without higher oil prices, and the Middle East will remain an economic bottleneck for a while yet. We do not yet ourselves think the long-term investment outlook has improved, then, and are not chasing the market higher. But we know that it could, and we are not expecting stocks to collapse either.

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