Energy Shock Tests Resilience – A Market in Tension

It has been a month defined by a widening gap between resilient fundamentals and increasingly uncertain macro conditions. Strong corporate earnings – particularly in the US – have been overshadowed by a deteriorating geopolitical backdrop, an energy price shock, and rising concerns around inflation persistence.

At the centre of the market narrative remains the evolving conflict in the Middle East and the continued disruption to oil flows through the Strait of Hormuz. While markets have avoided a sharp drawdown, the forward-looking implication is clear: this is no longer simply a volatility event, but a developing supply shock with potential spillovers into inflation, policy, and growth.

Macro Backdrop: From Resilience to Risk

Economic data continues to point to a resilient starting point for global growth, but the trajectory is becoming more fragile. While activity indicators remain broadly stable, the combination of rising energy prices and elevated inflation is shifting the macro narrative toward a more stagflationary environment.

Inflation readings have moved higher, with central banks increasingly signalling caution. The policy bias has shifted away from easing, with a higher probability that rates remain elevated for longer, and in some scenarios, could rise further if energy prices remain elevated. We currently see central banks (with perhaps the exception of the US Federal Reserve) as viewing the current impact of the crisis as an inflationary supply shock rather than precipitating a growth slowdown, which reenforces the view that upward pressure on rates will remain.

info-01

At the same time, the transmission of the energy shock remains a key uncertainty. While the current shock has yet to materially disrupt global growth, prolonged constraints on supply – particularly if the Strait remains impaired – would increase the likelihood of a more meaningful slowdown alongside persistent inflation pressures.

info-02

Iran and energy remain the Dominant Driver

Markets through April have been driven by the ongoing US–Iran conflict and associated disruption to global energy flows, with the Strait of Hormuz remaining a critical focal point. While there have been intermittent developments toward negotiation, meaningful progress remains limited and the outlook remains highly uncertain. Indeed, Persian Gulf production has been cut by more than 10mb/d, with cumulative supply losses now pushing towards 1bn barrels.

In spite of this, the shock is largely being reflected in pricing dynamics rather than a material tightening in physical supply. However, the issue is not current inventory levels, which remain adequate - despite an estimated drawdown of nearly 200mbbl in April alone (the largest on record) - but the risk of future supply constraints. If physical disruption materialises, it would likely feed directly into inflation and reinforce the “higher-for-longer” rate environment, the combination of higher rates and physical supply disruptions putting further pressure on growth. Forward markets are beginning to price a higher probability of disruption over coming months as pricing on forward contracts has moved up toward current spot pricing. The chart below shows the spread between spot and forward contracts narrowing sharply around mid-April.

info-03

Beyond oil, the broader impact across petrochemicals and industrial inputs is becoming more evident, with rising input costs feeding through to corporate margins and consumer prices. This dynamic is particularly acute for energy-importing regions, where the shock acts as both a growth headwind and an inflation catalyst.

info-04

Strong Earnings, Limited Conviction

In spite of the challenges emanating from the Middle East, the US earnings season has once again delivered robust results, particularly within large-cap technology where AI-driven demand remains highly visible and contractually supported. Growth in cloud, infrastructure, and AI-related capex continues to validate the structural thematic underpinning equity markets. This culminated in a very strong return of over 10% for US equities in April, albeit following a 5% drawdown in March.

However, the market’s reaction to recent earnings results tells a more cautious story. Despite strong beats and improving earnings expectations, market price reactions to these strong results have been muted by historical standards, which suggests investors are increasingly focused on forward risks rather than backward-looking strength. This divergence reflects uncertainty around how higher energy costs, tighter financial conditions, and evolving geopolitical risks will feed through into earnings over the coming quarters.

More broadly, this remains a market increasingly driven by structural winners. Capital continues to concentrate in sectors with clear earnings visibility and durable growth drivers – most notably AI and technology infrastructure – while more cyclical and rate-sensitive sectors lag.

info-05

As at 5/5/2026

Regional Positioning: US Leadership, Broadening Opportunities

Alongside strong earnings, the US also appears relatively well positioned from an economic standpoint. While Q1 GDP came in below expectations (2% vs 2.2% consensus) and was flattered by one-off supports (front loaded imports, a federal spending rebound, and a data-centre capex surge), the US labour market appears stable for now – with the number of reported job openings roughly equal to the number of unemployed. Relative energy independence also supports the backdrop for the US.

Outside the US, opportunities remain but are more nuanced:

• Emerging Markets are increasingly attractive, supported by improving earnings momentum and exposure to the AI supply chain. While some countries within the asset class are exposed the energy shock, such as India, other regions such as Latin America can benefit as net energy exporters. China has also showed a degree of resilience to date despite its energy importing needs.
• Europe faces near-term headwinds given its energy dependence and limited exposure to the AI theme, despite improving longer-term fundamentals and potential benefits from spending on defence.
• Japan continues to benefit from structural reforms and earnings improvements alongside potential increased fiscal spending but remains exposed to imported energy risks and near-term volatility.
• Australia faces a particularly challenging backdrop, with higher energy prices, tightening policy, and softening confidence indicators expected to weigh on growth and earnings.

In our view, this reinforces a preference for selective global exposure, with a bias toward regions and sectors with stronger earnings visibility and less sensitivity to the energy shock.

Asset Allocation Implications

Portfolio positioning remains cautiously pro-risk but increasingly selective. While growth assets retain a modest overweight, positioning has been dialled back relative to pre-conflict levels to reflect the binary nature of geopolitical outcomes.

Within equities, the emphasis remains on global unhedged exposures – where we have increased allocations to US equities and emerging markets – given both earnings strength and the defensive characteristics that currency provides in periods of heightened uncertainty.

In fixed income, inflation risk remains the dominant theme. Positioning reflects a view that markets may be underestimating the persistence of inflation, with allocations tilted toward shorter duration and inflation-linked assets, alongside tactical curve positioning.

Portfolio construction considerations during times of stress

The current environment reinforces the importance of diversification, though the traditional relationship between asset classes is being challenged. During energy-driven shocks, both equities and bonds can come under pressure simultaneously, limiting the effectiveness of conventional diversification.

Inflation remains a central risk, with markets potentially underestimating its persistence. As a result, portfolio construction is increasingly focused on incorporating inflation protection, including allocations to inflation-linked bonds and real assets. Within equities we also favour sectors like materials which are typically able to perform better in inflationary environments.

Infrastructure continues to play an important role given its linkage to energy and inflation dynamics, while gold remains supported by long-term structural drivers despite near-term volatility linked to real rates and liquidity dynamics.

Currency positioning is also critical. While we see the Australian dollar strengthening structurally over the medium term, near-term uncertainty and geopolitical risk justify maintaining diversified currency exposure, including unhedged global positions to provide downside protection. This positioning aims to add another layer of diversification, particularly in an inflationary environment where the traditional negative correlation between stocks and bonds tends to break down.

More broadly, portfolio construction is evolving toward a greater emphasis on structural exposures – such as AI, infrastructure, and real assets – alongside a more deliberate approach to managing geopolitical and macroeconomic risks.

info-06

Conclusion – cautious optimism in an increasingly complex environment

Global growth began the year from a position of relative strength, supported by resilient economic activity and robust corporate earnings. However, the emergence of an energy-driven inflation shock and ongoing geopolitical uncertainty has introduced a more complex and less predictable environment.

While the base case remains one of continued, albeit slower, growth, the balance of risks has shifted. Markets are increasingly focused on forward outcomes – particularly the evolution of the energy shock, central bank responses, and the durability of earnings.

In this context, maintaining a selective, diversified, and structurally oriented portfolio remains critical, with an emphasis on resilience, flexibility, and the ability to navigate a wider range of potential scenarios.

Real assets such as infrastructure continue to play an important role as inflation hedges, while gold, despite near-term volatility, remains supported by longer-term structural drivers.