Equity resilience continues despite rising tensions

Markets have once again swung back to being headline-driven, with geopolitics reclaiming centre stage overnight. The escalation in tensions around the Strait of Hormuz, including direct confrontation between US forces and Iranian-backed units, has reignited the war trades, pushing oil higher and underpinning the dollar. The strike on Gulf energy infrastructure has also reminded markets that supply risks are not just theoretical, but increasingly tangible.

Despite this, the broader market reaction remains notably restrained. Equities have not meaningfully repriced lower, suggesting investors are still operating with a glass-half-full mindset. The prevailing view appears to be that, while tensions are elevated, the situation will ultimately de-escalate or at least remain contained enough to avoid a lasting hit to global growth and corporate earnings. In essence, markets are continuing to price through the conflict rather than price it in.

That stance is being supported by strong fundamentals, particularly in the US. Earnings season has delivered robust results, with double-digit growth and expanding profit margins providing a solid foundation for equities. This has helped anchor valuations and justify the rally, even as macro risks build. However, it also means that markets are effectively pricing a best-case scenario, one where higher energy prices do not materially feed through into costs, inflation or demand.

This leaves positioning looking increasingly asymmetric. If the current assumptions hold — contained conflict, stable energy flows and resilient earnings — then there may be limited upside from here. But if tensions escalate further, or if energy prices remain elevated long enough to impact margins and policy expectations, the downside risks become more pronounced. The technical backdrop reinforces this vulnerability, with the S&P 500 appearing stretched after a rapid recovery and potentially primed for at least a short-term pullback.