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By Mike Dolan
Global investors and the International Monetary Fund seem to agree the Iran war is likely over – bar the shouting. The energy market is less sure, and there could be an awful lot of shouting, but many asset prices have returned to square one, and markets now see the conflict’s impact only at the margins.
The IMF’s unenviable task of forecasting global economic growth during a Middle East war and energy shock left as many questions as answers, and a plethora of different scenarios. Take your pick.
The Fund’s central conclusion was probably most powerful in what it didn’t do rather than what it did.
The IMF made no change to its global gross domestic product (GDP) growth forecast for 2027 compared with its last update in January – three months before the war. Yes, it clipped this year’s expansion and there’s a lower starting point as a result. But next year is essentially expected to develop much like the Fund saw it pre-war in January and even back in October – 3.2% world growth.
Even before those forecasts were released on Tuesday, many in the markets had effectively decided the same.
Wall Street stocks returned to pre-war levels of February 27 on Monday, completing a 565-point, near-10% round trip. The VIX “fear index” of implied volatility has subsided to its lowest since February.
Global stocks captured by the MSCI All Country World Index are not quite back there yet – but they’re just 1% from the record highs set two months ago. The pivotal euro/dollar exchange rate is back to February levels too.
TOO MUCH, TOO SOON?
Much has been made in recent weeks of how little full-year corporate earnings forecasts have been affected by the oil shock. Flattered by tech and energy firm upgrades, aggregate 2026 earnings growth estimates have actually climbed 2-3 percentage points since the war started.
Calendar 2027 growth forecasts are still cruising at 18% and 11% for U.S. and European blue chips, respectively.
Real or imagined, 12-month forward price/earnings valuations for the S&P 500 and MSCI all-country cheapened more than 10% in the month through early April.
The temptation to screen out the war, bet on eventual de-escalation and focus on the year ahead has been hard to pass up.
That logic drove BlackRock – the world’s largest asset manager – to switch back this week to an overweight position in U.S. stocks and emerging markets.
‘TREACHEROUS MOMENT’
It’s not as if nothing has changed, of course.
With global oil and gas still bound up in the ongoing Gulf hiatus, front-month crude futures are still up a third and natural gas and fertilizer prices remain elevated. Airlines fear shortages of jet fuel ahead.
Even the IMF admits the longer the Middle East energy crunch persists, the more its “adverse scenarios” come into view.
Billionaire investorKen Griffinwarned on Tuesday of a “treacherous moment” and reckons closure of the Strait of Hormuz for 6-12 months will end in global recession.
But the way oil futures are behaving, that’s still not the market’s best guess. Brent crude futures through this year and next show some normalization. Even though they are still 10-15% higher than February levels, ready-reckoners – quick, rule-of-thumb models – suggest that would only shave 0.2-0.3 percentage points off global GDP growth.
That’s simply not enough for portfolios to go to ground – whatever you think of the wider inflationary or political fallout.
The interest rate and bond markets have not returned to pre-war levels – the lingering risk of resurgent inflation and the outside chance of central bank rate rises keep them there.
While that’s still a guessing game that hinges on the length of the conflict too, 10-year Treasury borrowing rates are still some 30 basis points above February levels and Federal Reserve futures markets only see about a 30% chance of rate cuts resuming by year-end. Mortgage rates have barreled higher too and corporate bonds have been rattled by jitters in the private credit world.
Global asset managers polled by Bank of America this month clearly scaled back their early-year bullishness, with sentiment gauges slipping back to last summer’s funk. Inflation expectations have climbed too.
But chiming with oil futures, the weighted average of forecasts for year-end crude prices was $84 per barrel and “long oil” along with long global chip stocks were identified as the most crowded trades on the planet.
Less than 10% of funds surveyed expect recession ahead. While average cash levels stayed at 10-month highs last month, they remain well below prior extremes during last year’s April tariff shock or the Ukraine invasion in 2022.
That’s not exactly complacency – but neither is it a panicked herd.
Second-guessing the conflict will remain a daily obsession, even if an increasingly price-insensitive one. But market de-escalation has already begun. Only time will tell if that’s premature.
The opinions expressed here are those of Mike Dolan, a columnist for Reuters.
Editing by Marguerita Choy
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