Trump’s Iran gamble fails to derail markets

Markets have had a great deal to absorb this year. The conflict involving Iran, the closure risk around the Strait of Hormuz, tariff uncertainty, and concerns about the scale of investment into artificial intelligence have all created periods of volatility.

Despite this, markets have remained remarkably resilient.

Global equity markets recovered strongly through May and early June, helped by improving sentiment, continued earnings growth, and expectations that central banks may avoid a sharp policy response unless inflationary pressures become more persistent.

Three key themes are shaping the market outlook.

The first is geopolitics. The Iran conflict and the risk of disruption to oil supplies remain important sources of uncertainty. Tariffs and trade tensions also remain on the agenda. However, markets have increasingly looked through some political threats when investors believe the eventual outcome may be less severe than the initial rhetoric.

The second is the AI boom. Markets are still working through which companies will benefit most from the enormous investment in AI infrastructure, and which may struggle to justify the level of spending. Some businesses may overspend, and some will inevitably fall behind, but the wider infrastructure build-out could still act as a meaningful growth catalyst for the global economy.

The third is rotation. If AI growth expectations moderate and corporate finance costs continue to ease, investors may see a shift from growth stocks to value and from large companies to smaller ones. The oil shock and inflation concerns have delayed some of that rotation for now, but the longer-term theme has not disappeared.

Looking ahead, the market backdrop remains broadly supportive, but not without risks. Equities continue to benefit from resilient earnings growth and the AI investment theme, although valuations could come under pressure if energy costs stay higher for longer or if growth disappoints.

For bonds, the picture is more mixed. Higher interest rates would be a difficult response to an oil shock, but weaker growth prospects may also help contain inflation concerns later in the year. At the same time, high fiscal deficits continue to put upward pressure on long bond yields.

The overall message is one of cautious optimism. Loose fiscal conditions and the AI capital expenditure boom could create supportive market conditions, but a prolonged oil price shock could slow progress by weakening consumer demand and renewing inflationary pressures.

Even so, elevated energy prices are not currently expected to push the global economy into recession.

For investors, this remains an environment where patience and diversification are important. Markets can react quickly to geopolitical headlines, inflation data and policy signals, but long-term investment decisions should be guided by fundamentals rather than short-term noise.

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