The military confrontation in the Middle East may have eased, but the obstruction of the Strait of Hormuz remains. As a result, the disruption to global supplies of oil, natural gas, fertilizer inputs, and other raw materials exported by Gulf states continues. With inventory drawdowns and demand destruction underway, investors should remain vigilant about the risk of stagflation.

Yet equity markets showed little concern in April. Both the S&P 500 and the NASDAQ posted double-digit gains during the month, alongside those in South Korea and Taiwan. Artificial intelligence (AI)—especially semiconductors—is back in vogue, as we highlighted in the 2026 Market Outlook. Can investors’ enthusiasm be reconciled with the economic challenges ahead?

Running on (almost) empty?

As the U.S.–Iran conflict enters its third month, both sides remain in a stalemate. While a ceasefire is in place, negotiations have made little progress. More importantly, the ceasefire has failed to restore traffic through the Strait of Hormuz. Estimates from J.P. Morgan’s investment bank research suggest that disrupted global supply reached 13.7 million barrels per day (mbd) in April. Unfortunately, most spare production capacity sits in Saudi Arabia and the UAE—effectively stranded on the wrong side of the Strait. The disruption also extends to key fertilizer inputs, including urea, ammonia, and sulphur.

With the last Middle East shipments arriving at their destinations a few weeks ago, demand destruction is now emerging. This is estimated at 4.3 mbd in April, up from 2.7 mbd in March. Flights across Asia and Europe are being cancelled as jet fuel becomes more expensive and less readily available. Farmers in the Northern Hemisphere also face difficult decisions about how much to plant, given reduced fertilizer supplies.

This puts central banks in a familiar dilemma. On one hand, higher fuel prices are driving supply-side inflation. Food inflation may follow with a lag if agricultural production declines later in the year due to today’s higher fertilizer costs. On the other hand, supply constraints are slowing economic activity. Elevated uncertainty also encourages households and businesses to be more cautious with spending and investment.

Some central banks have chosen to prioritize inflation, including Singapore and the Philippines, by tightening monetary policy in April. Meanwhile, the U.S. Federal Reserve (Fed) held policy rates steady, as expected, at its April meeting. That said, divisions within the Federal Open Market Committee (FOMC) appear to be growing over whether to maintain an easing bias in the statement, with three voting members opposing the tilt toward future rate cuts. In our view, this division is a positive sign: It suggests members are exercising independence and forming policy views based on incoming data and unfolding events.

The Bank of Japan (BoJ), European Central Bank (ECB), and Bank of England have all taken a “wait-and-see” approach, while leaving the door open to tightening if elevated energy prices spill over into broader inflation.

Fiscal policy is also being used to provide relief to households and businesses. In Indonesia and Malaysia, existing fuel price controls mean higher costs are effectively passed through to the government and absorbed via additional spending. Other Asian governments are implementing temporary fuel price caps or adjustment mechanisms to reduce public anxiety about shortages.

Overall, while we hope the Strait will be unblocked soon, a breakthrough does not appear imminent. If this bottleneck persists, the global economy faces a significant risk of stagflation.

Investors are looking at the bright side of life

Equities—particularly technology stocks—have largely brushed aside these economic and geopolitical challenges. Investors appear focused on the long-term growth prospects of AI, particularly demand for compute, and the resulting need for data centers and semiconductors. This narrative has been reinforced by strong earnings, including results from semiconductor manufacturers in South Korea and Taiwan.

We have argued over the past 18 months that these two markets offer unique opportunities due to their advanced capabilities in high-end semiconductors and memory chips—areas with few true competitors. Their competitiveness supports strong pricing power, which helped last year during tariff turbulence and is again proving valuable amid rising costs. Their earnings strength also supports current valuations.

That said, risks remain. These manufacturers are still exposed to the global capex cycle and could be vulnerable to any pullback in investment by AI hyperscalers—whether due to financial constraints or a decision to slow compute buildouts. For now, this seems unlikely given the early stage of model development and continued investment intent reflected in 1Q earnings reports. Future competition from China is another potential challenge, although the gap between China’s production capabilities and Taiwan/Korea’s leading-edge products will likely remain significant, especially given China’s constraints in manufacturing equipment.

Beyond hardware, 1Q earnings from mega-cap technology companies point to a consistent message: AI adoption by consumers and businesses is progressing, and this is translating into strong demand for cloud computing. Even so, investors are still penalizing companies planning major increases in capex and data center buildouts—particularly if their AI models are perceived as less competitive. This differentiation is reassuring: It suggests the market is not in a state of irrational exuberance. However, it also underscores that active management remains critical to identifying the companies best positioned to benefit from AI’s progress over the coming years.

What does this mean for investors?

At the start of the U.S.–Iran war, we reiterated that a stock–bond portfolio typically outperforms cash over one- and three-year horizons in most geopolitical conflicts. It is therefore understandable that investors are focusing on long-term AI growth themes and the related beneficiaries. However, with roughly 14% of global crude oil supply blocked, economic and financial volatility could persist for months. This reinforces our 2026 Market Outlook message: Maintain investment discipline through diversification and income generation.

Diversification is needed across both geographies and asset types to help navigate volatility. We agree with the market’s focus on technology and semiconductors, which may be relatively more resilient during energy-driven volatility. Sectors such as financials and defense may also continue to deliver solid earnings.

Income-generating assets—including fixed income, alternative assets, high-dividend equities, and options overlay strategies—can provide more consistent cash flow even when asset prices are volatile. In fixed income, we still prefer short duration given uncertainty around inflation and fiscal deficits, particularly as governments increase spending to offset higher fuel and food prices. High-yield corporate debt fundamentals remain stable, and relatively high all-in yields can provide steady income for investors.

Global economy

• As the U.S.-Iran war continues, concerns about stagflation continue to rise. April began with hopes of a resolution after U.S. President Trump signaled a willingness to wind down the military campaign. However, talks in Islamabad quickly fell apart, and a second round never took place. Mid-month, the U.S. imposed its own blockade of the Strait of Hormuz to pressure Iran back to the table. By month-end, Trump had rejected Iran's latest peace proposal, with reports emerging that the U.S. may consider further strikes, leaving the conflict at a stalemate.
• The Fed FOMC held the policy rate unchanged at 3.50%–3.75%, as expected. The statement upgraded its description of inflation from "somewhat elevated" to "elevated, in part reflecting the recent increase in global energy prices," a direct acknowledgement of the oil shock. While the Committee maintained an easing bias, three voting members dissented, arguing the inflation backdrop no longer warrants it. Fed Chair Jerome Powell reiterated his view that tariffs are likely to represent a one-time price level shift rather than an enduring inflation process, though the energy spike may warrant a more cautious stance given uncertainty over duration and pass-through into expectations.
• The Bank of England left rates unchanged, retaining a tightening bias. The ECB also held policy rates unchanged, keeping the deposit rate at 2%. The key issue for both institutions remains whether the energy shock stays temporary or becomes embedded via wages and pricing behavior.
• In Japan, monetary policy continues in a cautious wait-and-see stance, as the BoJ pushed back rate hikes in April. However, an increasingly hawkish tilt is also evidenced by the wider dissent pattern and an upgrade to its inflation forecasts, despite government subsidies and energy shocks that cloud the readability of underlying inflation.

Equities

• Global equities staged a sharp recovery in April, reversing March's war-driven sell-off. The MSCI World rose 10%, with the S&P 500 up 10%, its best month since November 2020, and the Nasdaq surging 15%, its best month since April 2020, both ending at record highs. The rally was driven by a resurgence in AI optimism, with Tech and Communication Services the standout sectors.
• Asian equities rebounded sharply in April, reversing double-digit March losses to hit new record highs, though a growing divide emerged across the region. Tech-heavy markets led the charge, with Korea surging 31% and Taiwan jumping 23%, as investors looked past near-term geopolitical tensions to refocus on AI and semiconductor themes. The Hang Seng Index rose 4% and the CSI 300 gained 8%, while Southeast Asia and India lagged, weighed down by high energy price exposure, inflation risks, and fiscal concerns.

Fixed income

• U.S. Treasury (UST) yields were slightly higher over the month, with yields on the 2-year and 10-year up 9 basis points (bps) and 7 bps, respectively. Ongoing negotiations in the Middle East conflict have kept yields largely rangebound, although stronger domestic data and a hawkish Fed meeting added upward pressure to yields, with markets pricing in no changes to policy rates for the rest of this year.
• Credit markets similarly reflect expectations for easing geopolitics and resilient corporate fundamentals, with both global investment grade and high yield bonds up 1.3% and 2.6% over the month, as spreads narrowed 11 bps and 54 bps, respectively, back toward the tighter end of their historical range.

Other financial assets

• Oil prices were still under the spotlight given the war with Iran. Brent crude surged 6% from USD 104 per barrel to USD 110, driven by Trump's signaling of a prolonged Iranian blockade and the collapse of peace talks. A major market development was the UAE's decision to exit OPEC and OPEC+, with production capacity expected to rise. Gold stayed flat. Rising interest rate expectations and the fading of the initial geopolitical shock outweighed safe-haven demand despite ongoing Middle East tensions.
• The U.S. dollar partially retraced the previous month's gains on easing risks of further conflict escalation, with the DXY declining 1.9% to 98.1 over the month. European and Asian currencies mostly gained, as markets continued to price in the risk of central banks tightening monetary policy to contain inflationary risks, with the EUR up 1.8%, the GBP up 3.0%, the JPY up 1.5%, and the AUD up 5.0%.

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