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Video recorded on 7 May 2026
Markets have rebounded sharply since the announcement of the ceasefire in Iran, with global equities and credit spreads now exceeding their pre-war levels. Yet the Strait of Hormuz remains completely closed, removing 10% of oil supply. Oil and gas prices have risen by 45% and sovereign bond yields by 30 basis points since February.
Has the economy become immune to oil and geopolitical shocks, or are the markets being overly optimistic?
Our base case remains that the Strait of Hormuz will reopen in the coming weeks, as pressure mounts on both sides to find an acceptable way out. The US president’s poll ratings are at an all-time low, and rising petrol prices are problematic in the run-up to the mid-term elections. On the other hand, Iran has a vital need to export its oil via the Strait of Hormuz, which is no longer possible due to the US blockade.
In this scenario, oil prices would not return to their pre-war levels but would fall back fairly quickly by the summer, and, crucially, shortages would largely be avoided.
That said, we are forced to push back our forecast for the reopening of the Strait of Hormuz. However, the longer the energy crisis lasts, the greater the stagflationary impact on the global economy.
If Hormuz remains closed until the summer or if energy infrastructure in the Middle East is severely affected, a reversal of the global cycle will be difficult to avoid. The risk of this deadlock scenario, which is very negative for the markets, remains significant in our view, with a probability of around 30%.
In our base-case scenario, the energy shock and uncertainty already experienced would sharply reduce growth by mid-year, particularly in Asia (excluding China) and in Europe. However, the global cycle would hold up in the short term, supported by strong pre-crisis momentum, fiscal stimulus and the tech investment boom.
Inflation would rise slightly further in the coming months due to energy prices. But it would subsequently ease, and the spillover to the prices of other goods and services would be limited.
For the Eurozone, we expect growth to be halved this year but to remain positive, above 0.5%. Inflation is likely to remain above the 2% target this year but would return to the target over the course of next year. In the United States, the slowdown would be less pronounced but inflationary pressures would persist for longer.
Central banks are expected to adopt a slightly more restrictive stance than anticipated prior to the war, in order to bolster their credibility in combating inflation, but they will do so cautiously due to the temporary, recessionary impact of the shock. The ECB is expected to raise rates once in June, and the Fed is not expected to cut rates until next year.
Our outlook remains positive for equities in the medium to long term. The recent market rally is supported by an acceleration in corporate earnings at the start of the year, meaning that equity valuations remain 5% below their pre-crisis levels. However, our outlook moderates but does not call into question the bullish earnings outlook. Furthermore, the rebound has been fairly selective across sectors, suggesting that risk appetite has normalised but is not excessive.
That said, the market is now pricing in our favourable scenario regarding the war and energy, whilst risks remain significant. And corporate profit expectations are likely to be revised downwards slightly in the coming months, particularly in Europe.
In these circumstances, we are reducing our short- -term overweight in equities, with no defensive track record, and prefer US and emerging market equities to European and, above all, Japanese equities.
On the bond side, we remain overly overweight in government bonds, particularly in Europe and at the short end of the curve.
The rise in interest rates since the start of the conflict reflects inflationary risks as well as several ECB rate hikes, which we believe is excessive given the negative impact on growth and the limited pressure on prices beyond energy. That said, rates are unlikely to return fully to their pre-war levels as the monetary and fiscal outlook will remain less favourable than at the start of the year.
On corporate credit, we continue to benefit from carry on high-quality corporate bonds, whose fundamentals should hold up well against a limited deterioration in the macro backdrop. However, we are reducing our exposure to riskier companies, which offer a lower premium than before the crisis despite persistent risks linked to technological disruptions and the contagion of mistrust towards US private credit.