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• Hopes of a reopening of the Strait of Hormuz suffered a setback over the weekend. But talks continue to end the conflict, which is entering its eighth week. The outcome will set the tone for markets.
• In the meantime, investors have also been turning their attention back to fundamentals, with a positive start to the first-quarter US earnings season buoying sentiment. With around 15% of the S&P 500 reporting this week, investors will be looking to see if profit growth can justify fresh record highs for US and global stocks.
• Finally, while US stocks have been hitting record highs, the most recent Michigan survey of consumer sentiment reached the lowest point in its 70-year history. Will consumer and business sentiment improve to reflect increased optimism overa peace agreement in the Middle East?

Can the equity rally go further as focus shifts to earnings?

Global and US stocks climbed to fresh record highs last week, as mounting hopes of a more lasting ceasefire in the Middle East allowed investors to once again focus on robust corporate profit growth. The S&P 500 ended the week at a record high with a gain of 4.5%, its third consecutive weekly advance. The scale and speed of the rise, however, left many investors asking whether the rally can go further. Assuming negotiations between the US and Iran deliver positive results, we believe they can.

The first-quarter US results season is off to a positive start, and we expect a 17% rise in earnings per share for the S&P 500 versus the same period last year. That would be the fastest growth rate in five years, when earnings were surging during the post-COVID recovery. This week, around 15% of the S&P 500 will be reporting, including influential companies like electric vehicle maker Tesla, along with energy firm Exxon Mobil and Proctor & Gamble in consumer staples. Our positive view on profits is partly based on the strength of the economic backdrop, with low unemployment, healthy wage growth, and an expansion of manufacturing activity.

Second, market positioning looks less positive than at the prior equity record high back in late January. Many investors sold during the period of peak anxiety over war in the Middle East and have remained on the sidelines during the rally, leaving more buyers waiting to allocate to equities on positive news.

Third, although US and global stocks are at record highs, valuations are not. This is because earnings expectations continued to grow during the sell-off. Against this backdrop, we expect further gains for US and global equities, with our base case being that the S&P 500 ends the year at 7,500.

Is optimism over a Middle East deal warranted?

Developments in the Middle East have remained fast-moving, with the potential for an imminent diplomatic solution changing daily and sometimes hourly. Confidence in a lasting peace continued to mount last week after a 10-day ceasefire between Israel and Lebanon lessened a key barrier to a broader agreement. Most promisingly, markets got a boost on Friday after Iran’s foreign minister said the Strait of Hormuz would reopen to commercial vessels for the duration of the ceasefire—a development that has been eagerly awaited by investors. But such optimism was swiftly undermined by news that the US intended to maintain its blockade of Iranian vessels, causing Iran to reimpose restrictions on the waterway. Israeli attacks in Lebanon added to concerns over the progress of talks.

As the conflict enters its eighth week, investors have become accustomed to a rapid flow of news. This week the key questions will be whether the US and Iran will agree to a reopening of the Strait while negotiations continue. Investors will also be focused on whether the truce between Israel and Lebanon can be put on a firmer footing.

Our view remains that we have passed peak geopolitical risk. Both sides have a strong incentive to find a deal. That said, we have been urging investors to expect a bumpy road to a lasting peace. Large gaps in the publicly stated positions of both sides remain. Reaching a durable compromise on such issues will require various rounds of talks, leading potentially to an ongoing ceasefire rather than a stable solution. With uncertainty remaining, we continue to advise investors to use bouts of volatility to enhance portfolio resilience through diversification and hedging. We also believe structured strategies can help equity investors navigate this challenging period, with different paths available depending on which scenario transpires, investors’ equity positioning versus financial plans, and their appetite for risk.

Can consumer and business confidence catch up with more upbeat investors?

One notable divergence in April has been between a record low for consumer confidence and record highs in global stocks. The preliminary reading of the University of Michigan Consumer sentiment index was the weakest in its 70-year history. One of the key questions for this week will be whether US consumer and business confidence recovers to match the more upbeat mood of investors.

The final reading of the Michigan survey will be released this week, with more updated responses. The prior release surveyed consumers between 24 March and 6 April, so this did not capture potential relief over the ceasefire between the US and Iran. Since worries over Iran were a notable cause for concern among the survey’s respondents—especially the issue of rising energy prices—some rebound would not be surprising, as hopes of a deal have risen. We also get US retail sales for March, with expectations for a solid outcome. In addition, there is the release of Eurozone consumer confidence for April along with business activity surveys from France and Germany. Finally, investors will be awaiting guidance on the longer-term outlook for US monetary policy, with the Senate confirmation hearing of Kevin Warsh, President Trump's nominee to replace Jerome Powell as chair of the Federal Reserve. Warsh has previously argued that deregulation and the widening use of AI are generating disinflationary forces that will permit the central bank to hold interest rates at a lower level. However, Warsh has also spoken in favor of shrinking the Fed's balance sheet.

Our view is that the outlook for consumption in the US and Eurozone remains healthy. So, within our Attractive view on US equities, we favor consumer discretionary, financials, health care, industrial, and utilities in the current environment. We have been advising investors to avoid overexposure to some of the tech stocks that have led the rally in recent years and come to form too large a part of some portfolios. In the Eurozone, alongside favoring some sectors like health care that are less exposed to higher energy prices and enjoy structural tailwinds, we recommend investors hold some more cyclical exposure, given our expectations for consumer resilience. On rates, we expect the Fed to cut twice this year, adding to the case for quality bonds.