Peace hopes and AI profits drive risk appetite

The dominant theme in markets remains a growing belief that some form of peace agreement between the US and Iran will eventually materialise.

 
Investors have steadily priced a “peace premium” into assets, helping suppress volatility and underpin a rally that has pushed Wall Street to successive record highs.

At the same time, the artificial intelligence story has only strengthened, with extraordinary earnings growth from technology companies reinforcing the view that AI monetisation is moving from promise to reality.

Together, these forces have created an environment where investors remain overwhelmingly focused on profits rather than risks.

That inflation question remains central to the outlook. Recent US PCE inflation data offered some reassurance, coming in slightly softer than feared and helping ease concerns that inflation was accelerating uncontrollably.

However, inflation remains elevated, and markets have increasingly shifted from discussing rate cuts to debating the timing of future rate hikes. The European Central Bank, in particular, is now expected to tighten policy further, while the Federal Reserve remains firmly in wait-and-see mode. For now, inflation is being treated as a rates story rather than an earnings story — and that distinction is critical.

As long as profits continue to grow, investors appear willing to tolerate higher interest rates. This leaves markets in an interesting position. On the one hand, valuations are elevated, momentum is extreme and positioning is increasingly stretched.

Technical indicators suggest many indices are overbought, and speculative activity has picked up. On the other hand, earnings growth remains genuinely exceptional, providing a fundamental justification for much of the rally. That creates a situation where markets may be vulnerable to short-term pullbacks without necessarily changing the broader trend.

The key question is what could eventually disrupt this momentum. A breakdown in US-Iran negotiations and a renewed surge in energy prices remains one obvious risk. Another would be evidence that inflation is beginning to threaten corporate profitability rather than simply influence interest rate expectations. So far, neither has happened. Instead, investors continue to focus on strong earnings, AI-driven growth and the prospect of eventual geopolitical stability.
 
Daniela Hathorn
Senior Market Analyst
capital●com