Equities hold firm despite ongoing geopolitical tensions

Financial markets delivered a mixed but overall resilient performance over the past week, highlighting an increasingly clear divergence between asset classes.

On the equity side, markets continued to move higher. Major US indices closed the week in positive territory, with the Dow Jones reaching a new all-time high and the S&P 500 posting its eighth consecutive weekly gain, the longest streak since 2023. This performance has been supported by a solid earnings season, suggesting that corporate fundamentals remain robust.

At the same time, the strength in equities is not as broad-based as headline numbers might suggest. A significant share of performance continues to be driven by a relatively narrow segment of the market, particularly technology and AI-related stocks. Strong results from companies such as NVIDIA have reinforced investor enthusiasm around artificial intelligence and the associated investment cycle. Outside these segments, performance has been more mixed, although small-cap and value stocks showed some relative outperformance over the week, suggesting a tentative broadening beneath the surface.

In contrast, bond markets have shown a more cautious tone, especially at the start of the week. Government bond yields initially rose across major regions. This reflected higher inflation expectations and a shift in the interest rate outlook. Energy prices and geopolitical tensions added to inflation pressure. At the same time, resilient economic data lowered expectations for near-term rate cuts. As a result, markets have moved towards a ‘higher for longer’ view of monetary policy. Bond yields eventually fell ahead of the long weekend on renewed prospects of a peace deal.

The divergence between equity and bond markets is creating a more fragile balance. Equity markets are still supported by solid earnings growth. However, rising bond yields are putting pressure on valuations and increasing sensitivity to downside surprises in economic data or disappointing corporate results. At the same time, investor positioning remains relatively optimistic. This could amplify market reactions if negative surprises emerge.

Geopolitical developments added to the week’s complexity. Early in the week, tensions in the Middle East drove higher uncertainty and volatility across asset classes. Sentiment improved later in the week and into the weekend, supported by signals that a potential agreement between the United States and Iran may be getting closer. While headlines remained fluid and at times contradictory, investors increasingly viewed developments as part of an ongoing negotiation rather than a move towards further escalation.

This shift in perception helped stabilise markets and supported risk appetite, offsetting some of the earlier caution seen in bond markets. More broadly, markets appear to be operating on the assumption that neither side has a credible alternative to negotiations, given the economic and political costs of escalation. As a result, investors are placing more weight on the de-escalation outcome than on individual headlines.

For investors, this reinforces the need for a balanced and disciplined approach. The fundamental backdrop remains supportive. However, divergence across asset classes suggests that markets may become more selective and potentially more volatile in the period ahead.

Alongside geopolitical developments, the coming week brings a wide range of economic data. These releases will give a clearer view of growth and the likely path for policy. Taken together, these releases will help assess whether the current mix of resilient growth and elevated inflation is holding. This remains a key factor for central banks and for broader market trends.

In the United States, the focus early in the week is on consumer confidence and economic activity. This includes the Conference Board consumer confidence index and the Dallas Fed manufacturing survey. The labour market also remains in focus: the ADP report on private-sector employment will provide an early signal, followed by weekly jobless claims. Thursday is the key day. Core PCE inflation (an inflation gauge based on personal consumptions expenditures stripping out volatile components such as energy and food), the Federal Reserve’s preferred measure, will be released together with revised first-quarter GDP and new home sales. Investors will be watching for any signs of persistent inflation and the strength of economic growth.

In Europe, attention turns to sentiment data. This includes economic sentiment, consumer confidence and inflation expectations, which help gauge domestic demand. Inflation data from Germany and France later in the week will also shape expectations for European Central Bank policy. In Asia, Japan will publish labour market and consumer confidence data, adding to the picture of domestic conditions.