A market caught between headlines and fundamentals

We’re now into the fourth month of the US-Iran conflict, and markets are still reacting to each and every headline. Very little has changed since the ceasefire agreed on 8 April. 

The newsflow keeps oscillating between reports of extensions or even peace talks and claims that neither is progressing. Markets tend to react to the news in a predictable pattern. Escalation headlines push oil prices and bond yields higher, give the dollar a modest lift and weigh slightly on equities. De-escalation has the opposite effect, as investors price out stagflationary risks linked to higher energy-related inflation squeezing global growth. 

Last week didn’t break that pattern. By the end of the week, oil prices were down 11%, 10-year bond yields fell by 12 and 11 basis points in the US and Germany, respectively, the dollar weakened by 0.3% and equities rose across the board. In short, markets finished the week influenced by reports of a ceasefire extension, the start of talks over Iran’s nuclear programme, and the prospect of unrestricted shipping through the Strait of Hormuz. 

Geopolitics was the main driver, but US data were also supportive. The latest personal consumption expenditures inflation reading, the inflation gauge the US Federal Reserve (Fed) tends to prefer, came in lower than expected. Jobs data and manufacturing activity were also reasonably solid, reinforcing the view that the US economy remains on a relatively stable footing. 

All this fits within our baseline scenario. We see the conflict as temporary, lasting three to six months, with a negative but overall modest economic impact. Over time, fundamentals tend to reassert themselves, and history suggests geopolitical events usually fade into the background for markets. That’s precisely why we don’t chase headlines. 

Instead, we favour portfolios that can work across a range of scenarios rather than relying on a single precise forecast. Given resilient growth and our baseline outlook, we continue to prefer equities over bonds. At the same time, we remain diversified so that renewed escalation would not materially derail performance.

AI-driven investment has supported growth and markets for several quarters. Semiconductors sit right at the centre of this story, which matters for us given our exposure through US and emerging market equities. The AI investment cycle is no longer just a US phenomenon. South Korea and Taiwan are anchoring critical parts of the global semiconductor supply chain, and the benefits are becoming more widespread. 

Share prices across the sector have risen sharply, in some cases at an exponential pace. That naturally raises the question: are we looking at a genuine supercycle or is this just speculation? In our view, the evidence suggests the former. 

Semiconductors and related hardware are not a niche theme. They are foundational to how the modern economy works and their importance has only increased with the acceleration of AI. Chips are embedded far beyond consumer tech. They sit at the core of strategic sectors such as defence and energy, where governments are actively pushing for greater autonomy and security of supply chains. 

This is also not just a story driven by excitement or narrative. Earnings have risen alongside share prices, leading to lower price-to-earnings ratios. In many cases, valuations are reasonable, even for the biggest names. Nvidia, Micron, Samsung Electronics and SK Hynix are all seeing strong profit growth. Notably, the two South Korean memory producers trade at less than six times projected earnings. 

Market structure matters too. Samsung Electronics, SK Hynix and Micron control roughly 90% of global supply of computer memory market. This gives them real pricing power, particularly as demand rises and production becomes more complex. This is a meaningful tailwind for profitability and, by extension, equity performance. 

Demand continues to surprise on the upside. Nvidia’s B200 chips, for example, are seeing demand growth of more than 20% in 2026. Anthropic has projected second-quarter revenue growth of 127%. Samsung Electronics’ CEO recently described the current phase as an unprecedented semiconductor supercycle, with customers increasingly looking to secure long-term supply contracts amid tight capacity. 

That said, this also introduces risks. Concentration is the most obvious one. Semiconductor and memory stocks now account for a large share of overall market gains. In May, they represented around half of the S&P 500’s total increase. There is also uncertainty around how long the data centre investment boom will last, given how much chip demand flows into that segment. Moreover, while some companies do look genuinely capable to deliver strong returns, other smaller, more indebted and less competitive players do not, so differentiation is important.  

For now, though, spending remains strong. US hyperscalers are on track to invest the equivalent of around 2% of US GDP in 2026. That acts as a form of ‘investment-driven fiscal stimulus’. And importantly, chips do not only go into data centres. They are finding their way into almost every part of the economy. 

While we think diversification remains important, and a good dose of risk mitigation is a key part of our strategy, as long as corporate and public investment stays firm, we believe this cycle may still have room to run, which could continue to support equity markets across both developed and emerging economies.

This week, most investor attention will remain focused on developments in the Middle East. That said, on the economic front, markets expect Eurozone inflation data (Tuesday) to come in at around 3%. In the US, expectations for Friday’s labour market report, which includes market-moving data such as non-farm payrolls and the unemployment rate, remain solid. This set of data is important for central bankers. It will help shape how comfortable they are with the current monetary policy stance given that the geopolitical backdrop brings uncertainty.