The environment is more uncertain with the conflict in the Middle East, but solid fundamentals support market dynamics.
Since the beginning of the conflict in the Middle East, equity markets have been operating in a more uncertain environment, marked by rising energy prices, the return of inflationary risk, and increased sensitivity to geopolitical developments. However, this shock comes at a time when macroeconomic fundamentals remain strong, particularly in the United States, where growth is supported by consumption, fiscal impulse, and investment linked to artificial intelligence. In the euro area, growth appeared more moderate but resilient, with inflation returning to levels significantly more contained than in 2022. At this stage, the conflict does not jeopardize the overall trend of equity markets, but it clearly modifies the balances and performance drivers.
From a macroeconomic perspective, the contrast between major regions remains crucial. The United States enters this phase with greater absorption capacity, thanks to stronger growth and greater energy autonomy. In contrast, the eurozone appears more vulnerable to a shock on raw materials, in a context of lower growth and still significant dependence on external supplies. For equity markets, this divergence is essential as it determines earnings resilience. Prior to the conflict, earnings growth expectations remained high on a global scale. Therefore, the issue is not an immediate collapse of results, but rather a gradual revision through several channels: direct exposure to the conflict zone, supply chain tensions, cost pressures, impact on the final consumer, and potential tightening of financing conditions if the conflict persists.
At this stage, the conflict does not appear to challenge the structural trends supporting global earnings.
Markets have responded less with a generalized decline and more with a rotation of segments most exposed to these new risks. The most consensual positions have been the first to be challenged, starting with some major US capitalizations linked to artificial intelligence, whose weight in global earnings growth remains significant. This concentration remains a performance driver but also a factor of fragility when questions of valuation, financing, or industrial supplies arise. Meanwhile, sectors related to consumption continue to suffer, penalized by consumer sensitivity to rising energy prices, while energy, utilities, and certain raw materials emerge as the main relative beneficiaries of the current sequence.
This evolution is also reflected in market styles. The momentum factor, dominant for several quarters, is fading, while the growth factor is slowing down. Conversely, value segments are holding up better, particularly supported by their more significant exposure to energy and certain cyclical sectors. At the same time, geographic diversification regains its relevance. Japan and several emerging markets continue to offer more balanced performance outlets, even though this universe remains very heterogeneous. Markets like Brazil thus appear better positioned in the current context, while some Southeast Asian economies remain more vulnerable to rising imported costs and supply disruptions.
In this context, our view of equity markets remains constructive but more selective. At this stage, the conflict does not seem to challenge the structural trends supporting global earnings, starting with artificial intelligence, electrification, and increasing energy infrastructure needs. However, it accelerates the revaluation of themes that were sometimes in the background, especially energy sovereignty and supply autonomy. For equity investors, the current period calls for less disengagement and more repositioning. In a less linear market, more sensitive to exogenous shocks and demanding on valuations, agility, diversification, and the ability to identify pockets of truly resilient growth are more crucial than ever.
