Why are markets showing resilience despite ongoing geopolitical risks?

Key takeaways

Markets appear resilient: Growth remains positive and inflation is below recent peaks, but the absence of a lasting geopolitical settlement means uncertainty is still elevated. There may currently be too much focus on headlines around peace talks rather than underlying, medium-term economic damage.

Beware inflation risks beneath the surface: Higher energy prices are already feeding into inflation expectations, particularly in the UK. While equities have so far been unruffled, government bonds are signalling greater inflation concerns, reinforcing the need to think carefully about interest-rate and inflation sensitivity in portfolios.

Active diversification matters more in concentrated markets: With equity indices heavily weighted towards a relatively small number of expensive stocks, passive exposure increases vulnerability to macro shocks. Global, actively managed portfolios offer greater flexibility to manage risk and target opportunities as conditions evolve.

With conflict in the Middle East starting in Q1, equity markets ended March down but have risen quite sharply in April. Credit markets also show optimism. There seems to be a consensus, perhaps just hope, that conflict may end sooner rather than later. This may be what the US, China and Europe desire given the damage being done to global growth and inflation prospects, but the leadership of Iran may be less convinced that a quick resolution is in their particular interests. There is no lasting peace agreement yet. Uncertainty still remains elevated. Today, oil prices are at a four year high with Brent Crude going above $126 per barrel based on fears regarding ongoing supply disruption. High oil prices have a future inflationary impact which constrains central banks; today, the Bank of England has not been able to cut the UK base rate, leaving it at 3.75%, and has suggested inflation may get to around 6% if oil prices sustain at high levels, necessitating rate rises ahead. In this environment, why are markets showing resilience despite ongoing geopolitical and macroeconomic risks?

Macro environment: Still supportive

Iran conflict: Global economic impact

 Strait of Hormuz commercial vessel crossings – year-to-date

 Source: Bloomberg, W1M As at 28.04.26

OECD 2026 growth and inflation forecasts

Source: OECD. Data as at 26 March 2026

With the supply of oil down sharply owing to the sharp fall in tankers coming out of the middle east, oil prices are around 60% higher than they were before the war began. That damages both the global inflation outlook and growth prospects as consumers face higher costs. But, as the table above shows, while growth expectations are being revised down, we are not yet expected to see a global recession. And, while inflation is higher, we are at levels far lower than seen in 2022 (after the invasion of Ukraine, UK inflation peaked at over 11%). If growth is still positive and inflation is not too far away from target levels, it is possible to understand why markets are not worrying too much at present. There is, of course, the risk that markets are too focussed on whether peace talks are on or off rather than the damage done to growth and inflation prospects; the need to be properly diversified in this environment is clear.

Fixed Income: Credit / corporate bonds are displaying optimism in that “spreads remain tight”, indicating markets are not expecting much economic stress from deteriorating growth and inflation prospects but a quick resolution to issues and rapid normalisation. The circles on the chart below show just how optimistic credit markets are being. The circle furthest to the right shows that the Iran war has led to an extremely sharp increase in oil prices (up around 60%) but spreads have not risen by nearly as much as they did with much smaller oil price increases in the past.  Again, we think that active choices matter in this sort of scenario and we are underweight credit.

Oil price shocks: Historical credit impact

US corporate high-yield – credit spread (basis points)

 Spread move vs oil price shock

 Source: ICE BofA, W1M. Data as at 31 March 2026. 

*Note: First year values used for ongoing conflicts greater than 1 year in duration

Government bonds have reflected greater inflation risk than equities. There has been a change in view from expecting interest rate cuts to anticipating increases in key developed markets apart from the US. UK government borrowing costs are higher than those of the US, reflecting a view that greater inflationary pressure will be faced here than there. The chart below shows that UK government bonds have also begun to perhaps show some signs of heightened political risk. Should the UK Prime Minister find his position further weakened after local elections (on May 7th when around 2 out of 3 seats defended by the governing party are expected to be lost) and if a new PM is put in place and is minded to further increase government borrowing and spending, a negative reaction from the Gilt market might not be a surprise. That is to say, the government could face higher interest rates for borrowing which could result in various fiscal and monetary policy challenges ahead. We remain underweight fixed income.

Adjusted for expected inflation, gilts have diverged again from treasuries. First sign of a political risk premium coming into the gilt market?

US and UK 10-year nominal bond yields minus 10-year inflation swap (on CPI)

Source: Bloomberg, W1M. As at 29.04.25

Equities: It might not be surprising to see downward revisions at some point but starting with robust corporate earnings growth estimates allows equity market sentiment to remain constructive even so.

2026 global earnings growth estimate +20%

+18% for the US in 2026; +22% for rest of world in 2026

Earnings per share calendar year growth rate

Source: MSCI, FactSet, W1M. Data as at  13.04.26

Concentration risk remains an issue given a relatively small number of tech stocks are still getting on for a third of the value of the largest equity market (S&P 500) and around a fifth of global equity market capitalisation.  As in 2022, when we last had an inflation shock, index funds may feel a negative impact from high valuations responding to inflation forcing interest rates to rise. Given the significance of US equities in global indices, concentration risk matters a lot more when it is evident in the US market.

Magnificent Seven at around 31% of US market capitalisation

Magnificent Seven Index as % of market capitalisation of S&P500 Index 2016 – current, weekly

Source: Bloomberg, W1M. As at 24.04.26

Active portfolios have the opportunity to avoid some of the most “expensive” stocks which could be at most risk from a deteriorating macro environment and W1M portfolios are certainly doing so. Our equity portfolios are global and hold around 40-50 stocks directly rather than index funds; recent good results from companies we have exposure to include GE Vernova which is demonstrating ongoing strong demand for its gas turbines and electrification products against a backdrop of limited supply (Q1 revenues were +16% YoY). Keyence, a Japanese technology company, reported profits reached an all-time high (+17% YoY) and its highest quarterly number on record (+24% QoQ) driven by its semiconductor and electronics divisions.  Alphabet (Google) has also reported strong results reflecting its strength in search, AI and other areas; we also have exposure to Amazon and Microsoft but choose not to own Nvidia, Tesla and Meta. We still find stocks with compelling medium-term cases but have moved to neutral in equities overall, reflecting the changing macro environment and concentration risk in major indices. Our equity portfolios aim to beat CPI inflation by 4.5% over the medium to long term.

Active stock selection is more important when market indices are concentrated

We invest in companies where the market underappreciates the quality of the business. This can either be the long-term sustainability of high returns or the improving fundamentals. We call these “Compounders” and “Improvers”.

Source: W1M, Google Images. As at 31.12.2025

Risk warning: This allocation should be used as a guide only. Differing market conditions may mean the above weightings will decrease or increase tactically. The investments listed are for example purposes and should not be considered as advice or a solicitation to buy or an offer to sell a security. 

Real Assets: In an uncertain environment with inflation risks, gold is of course interesting. It has fallen from its peaks early in the year, when we took profits, but the chart below shows that it may still be very “cheap” relative to equities.

Gold is not expensive relative to equities?

Gold price per troy ounce relative to S&P500 Index price - 1971 – current monthly

Source: Bloomberg, W1M. As at 29.04.26

The attraction of gold lies partly in it not being a “fiat currency” which can be printed in “quantitative easing” programs. And the mining of it requires prices to reflect inflation in the costs of doing so, giving it long-term inflation-resilience characteristics. Bitcoin was being touted as a sort of digital gold but has proved more volatile and underperformed gold in the last year, making gold even more attractive. Our real assets exposures are much more than just our gold related holdings but together add inflation resilience to our portfolios. Adding to energy exposure in our real assets holdings in February has been beneficial for W1M multi asset solutions.

Summary of our views

April asset allocation positioning

*The table shows bond allocations relative to bond composite index

**Hedging includes gold & Protection Strategy if possible.

Source: Morningstar. As at 05.03.26. The weightings are calculated as a percentage of the Waverton Balanced platform model portfolio and the peer group equivalent of Model GBP Allocation 40-60%. MSCI AC World weighting assumes a 60% allocation to equity. The above should be used as a guide only and is subject to change.

In summary, if the conflict with Iran ends sooner rather than later, as markets seem to expect, the global economy will have been damaged but, perhaps could hope to recover relatively robustly. There is, however, no permanent peace agreement yet. With this continuing uncertainty, we are content to be around neutral in equities currently, utilising proprietary protection strategies to mitigate any further market stress should it arise. Given inflationary pressures are stronger now, with much higher energy prices globally, we remain underweight fixed income. Inflation resilience from real assets, including gold and energy exposures, remains attractive to us. In an environment with stagflation risks, we believe that being global and active is key both in terms of controlling risk as well as in finding attractive medium and longer-term investment opportunities.

Further insights for Investment Professionals:

Read our April 2026 Investment Barometer

Watch the playback of our MPS & Multi‑Asset Fund Performance update and global outlook Q1 2026

Glossary of key terms

Credit Market: The part of financial markets where investors lend money to governments or companies, typically by buying bonds. Credit markets reflect how confident investors are about borrowers’ ability to repay.

Corporate Bonds: Debt issued by companies to raise capital. Investors receive interest payments and the return of capital at maturity, but are exposed to the risk that the company may struggle to meet its obligations.

Government Bonds: Debt issued by governments (such as UK Gilts or US Treasuries) to fund public spending. They are generally considered lower risk than corporate bonds, but their value can still be affected by inflation, interest rates and political developments.

Concentration Risk: The risk that arises when a portfolio or market index is heavily exposed to a small number of stocks, sectors or regions. This can increase vulnerability to shocks if those areas perform poorly.

Quantitative Easing (QE): A monetary policy tool where central banks purchase bonds to inject liquidity into the economy, lower interest rates and support growth. While QE can stimulate markets, it can also contribute to higher inflation over time.