Markets were caught off guard by the war in Iran. Initial fears of a stagflationary shock pushed rates higher and equities lower. While a resolution to the conflict remains uncertain, markets have increasingly treated the episode as a short-term disturbance rather than a structural macro shock. Equities have staged one of their fastest recoveries since 2011, led by growth stocks. In fixed income, higher yields have materially improved the opportunity set, once again offering attractive entry points, particularly in credit.
Return prospects have partially reset at a time when both micro and macro fundamentals remain decent to very strong. The medium-term outlook into 2026 is still supportive, underpinned by cleaner positioning and more reasonable valuations. Against this backdrop, our Core Investment Committee highlights three areas of renewed optimism.
Read also: Finding signals in the noise of the Iran oil shock
A rapid equities rebound
As ceasefire prospects emerged and negotiations continued – albeit unevenly – equity markets rebounded sharply. In the past, markets tended to fall fast and recover slowly. Since 2020, however, recoveries have become not only faster but more decisive. US equities took just 10 days to recoup post-conflict losses and move to new highs. While the pace of the rebound is striking, it is grounded in fundamentals. The Q1 earnings season delivered positive surprises, even against elevated expectations. This helped anchor risk sentiment and reinforced confidence in earning durability.
Performance has been less uniform elsewhere. Europe’s earlier outperformance has faded, while emerging market equities have rebounded without breaking new highs. Whether or not the Iran conflict ultimately proves transitory, it has already driven meaningful regional rotation.
FIG 1. Rebased equity indices’ performance since October 20251
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The tentative second phase of the crisis has left investors facing a notably different valuation landscape. Higher yields, combined with strong earnings delivery, have encouraged a reassessment of return expectations across asset classes.
In fixed income, spreads that began the year at tight levels have widened modestly. Government bond yields now price inflation risk well above pre-crisis assumptions, restoring income appeal and creating more balanced entry points.
In equities, valuation dynamics have also improved. The price-to-earnings-to-growth ratio (PEG) has fallen from elevated levels to below its long-term average. This indicates that earnings growth is now outpacing multiples. Even where valuation multiples have partially retraced, improving earnings growth prospects should help investors look through headline valuation concerns.
Taken together, these dual adjustments support higher expected returns by year-end, either via more attractive bond carry or stronger earnings growth.
FIG 2. Price-to-earnings-to-growth ratio for major equity indices (2011-2026)2
Read also: How vulnerable are US corporate earnings to an oil supply shock?
AI strikes back
This Q1 earnings season has marked a clear inflection point for AI-related assets. The focus has shifted away from new rounds of capital expenditure announcements towards tangible earnings growth. This has reignited investors’ fear of missing out on the AI story, underpinned by more fundamental drivers than in previous phases.
AI has already reshaped the technology sector’s composition. Software, once dominant, has ceded ground to semiconductors, which now represent 48% of the tech sector. Software weights have roughly halved following derating over the past six months. Beyond technology, the buildout of data centres is increasingly visible in the earnings of materials and infrastructure companies.
Read also: TSMC: the chip powerhouse at the centre of geopolitics and technology
Regional dynamics are also evolving. While US technology earnings momentum appears to have moderated this year, emerging markets (EM) continue to offer technology exposure with stronger growth profiles. Europe is also seeing an acceleration in technology earnings growth, albeit from a lower base.
The economic momentum behind the technology theme remains intact. This supports our view that 2026 should still be a strong year for earnings and broader market performance.
FIG 3. Growth rate of blended earnings per year for MSCI tech indices3
Read also: Mapping out the Iran war’s enduring impact on fixed income markets
Our positioning across asset classes
After a challenging period, our investment teams are balancing rising medium-term earnings risks against improving longer-term funding conditions in shaping our core positioning.
Multi asset. Following a temporary reduction in market exposure during the conflict, the All Roads team has begun rebuilding market exposure towards 140-150%. Allocation is shifting back into cyclical assets (40%) versus protection at 60% (rebased to 100%).
Fixed income. The Global Fixed Income team remains neutral overall, with an underweight in sovereign bonds, preferring Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries, and an overweight in EM hard currency debt. Credit exposure is neutral across both investment grade and high yield, with a selective tilt. The Asia Fixed Income team is overweight duration and favours defensive HY. The portfolio is overweight India, commodities and subordinated financials, while being underweight China, South Korea, Indonesia and southeast Asia.
Convertible bonds. Positioning remains constructive with overweights in the US and China. The global strategy portfolio is aligned with three high‑conviction equity themes: strategic national interest, AI hardware and the energy transition. The portfolio is short companies exposed to consumer spending and oil prices. Cash levels have been raised in anticipation of new issuance.
Equities. Our Global Equities team has increased risk by raising exposure to IT brands at the expense of consumer discretionary during market volatility. Regional exposure has shifted away from China and Europe towards the US and South Korea. Overweights include IT, communications services, consumer staples and consumer discretionary. The Sustainable Equities team is neutral across regions, favouring thematic exposure such as AI capex beneficiaries, rising demand for power in Europe and transition materials. The Swiss Equities team has raised overall exposure, with overweights in healthcare, information technology and industrials, while maintaining underweights in communication services, consumer discretionary, financials, real estate and utilities. The Asia Equities team has increased its conviction in high quality, stable growth companies, favouring technology, diversified industrials and consumer discretionary stocks over real estate and utilities.
