Tech Trumps Tehran

Tensions in the Middle East continued to hit the headlines in April and, although the conflict is still unresolved, stock markets rose sharply with US indices hitting new highs. US and Iranian officials are negotiating, reducing fears of worst-case scenarios. Meanwhile, corporate earnings reports have impressed investors with the technology sector recovering sharply from its poor performance earlier in the year. Investors and central bankers appear to be keen to look through geopolitical tensions, but we are not out of the woods yet as oil prices, and bond yields, remain elevated relative to pre-conflict levels.

The sharp recovery in stocks may seem inconsistent with much of the negative financial journalism we read but there are clear reasons behind it. Investors are expecting the conflict to be short. Use of strategic oil reserves and rerouting of Middle Eastern oil can alleviate shortages while US and Iranian leaders are in negotiations, raising hopes of a resolution. The presence of Pakistan as a mediator is expected to bring stability to discussions and reduce any miscommunication. Furthermore, the US decision to block the Strait of Hormuz should make the Iranians motivated to agree a deal because their economy is hugely dependent on the production and flow of oil and interruptions make future production more difficult. Shutting wells can damage flow pathways and make some oil permanently unrecoverable. The longer the blockade persists, the more economic disruption Iran will face. For the time-being, energy prices remain elevated relative to a couple of months ago, bringing risks globally to consumer and corporate budgets over the coming months. Nonetheless, the anticipation of an agreement has reduced fears of worst-case outcomes and brought relief to stocks.

In addition to tentative signs of a containment of tensions in the Middle East, corporate earnings reports confirmed another quarter of growth, providing further tailwinds for stocks. There is dispersion across regions and sectors as US companies outpaced their European counterparts and the technology sector outperformed. Previous fears over the misallocation of AI capex have not materialised. Semi-conductor manufacturers and providers of data storage have performed particularly well. Intel shares jumped over 100% in April, marking their best month since listing nearly 55 years ago, driven by strong results and a positive outlook. Furthermore, several of the largest IPOs in history may emerge in the coming quarters, with SpaceX, OpenAI and Anthropic reportedly preparing to list. Expectations of future index inclusion are already prompting pre-emptive buying in related stocks and signalling confidence in AI’s long-term durability. This acted as a tailwind for technology stocks, supporting the US market and those emerging economies with meaningful exposure to the sector. Meanwhile in Europe, results painted a cloudier outlook. Europe is heavily reliant on imported energy, unlike the US and, as such, companies are more sensitive to the current price spike. However, several European economies have implemented fuel duty cuts and price caps to help soften the impact of higher prices.

Inflation readings are beginning to show the effect of higher energy prices with US, Europe and UK readings printing higher in March, all in the 3.0-3.5% region and above their 2.0% targets. Higher inflation has weighed on bond prices and pushed yields up. In the UK, 10-year yields have risen above 5.0% for the first time since early 2008, a time when the economy was growing faster than it is today. Much of the latest move is due to inflation, with yields in the US and Europe also rising, but the UK market is also suffering from political uncertainty. A poor outcome for the government at Britain’s local elections next week could put further pressure on the UK Gilt market as investors question their grip on the public purse. In the US, bond investors are focused on the new Federal Reserve Chair, Kevin Warsh, who is expected to take the reins in May. Interviews show that Warsh’s favoured inflation measure is a ‘trimmed mean’ metric which strips out extreme price moves to leave the underlying inflation trend. This metric is far less sensitive to volatile energy prices and, therefore, this stance is welcome news for bond investors and borrowers.

Bottom Line

Disruptions triggered by the blocking of the Strait of Hormuz are likely to persist for some time. However, both sides are signalling a desire to limit escalation, enabling investors to see a tentative path to lower energy prices. In addition, corporate results are proving resilient and central bank messaging suggests there is no rush to raise interest rates. Uncertainty remains but April’s strong stock market performance serves as a reminder that markets do not need full clarity to move, and, for long-term investors, it is often best to stay invested.

Noteworthy

What is a Unicorn?

Not that long ago, reaching “unicorn” status, a private start up valued at over $1 billion, felt like the ultimate milestone for founders. When Aileen Lee of Cowboy Ventures coined the term back in 2013, it was meant to capture just how rare those businesses were at the time. Fast forward to today, and that rarity has largely disappeared, there are now well over a thousand unicorns globally, and the vocabulary has had to evolve accordingly. We now talk about “decacorns” for private companies worth more than $10 billion and even “hectocorns” for those exceeding $100 billion.

The ceiling is still rising, and attention is shifting to a new class of private companies operating at a far greater scale. Businesses like SpaceX and Open AI, already valued in the hundreds of billions and by some estimates, on a trajectory toward trillion-dollar status while still private, underscore how far the landscape has evolved. Whether or not such valuations ultimately prove durable, the broader trend is clear that the most transformative companies no longer need to access public markets to scale, as private capital has evolved to provide the depth of funding required to support their growth.

Earnings Season

As we reach the mid stage of an earnings season in a world dominated by the ramifications of the Iran war, corporate results are proving resilient. Earnings growth has remained solid across key sectors, with technology continuing to benefit from sustained AI driven investment, recent results from Alphabet and Amazon highlight how firms with established cloud platforms are successfully translating AI demand into tangible revenue growth. At the same time, heightened market volatility has been a tailwind for global banks, with institutions such as JPMorgan and Goldman Sachs delivering robust trading revenues, particularly across fixed income and commodities desks. Energy companies have also reported strong results, with majors such as BP benefitting from the spike in oil prices. Overall, earnings so far underscore the resilience and flexibility of corporate balance sheets, indicating businesses are well positioned to navigate near term volatility.