Financial markets continue to show remarkable resilience. Global equities are trading close to all‑time highs, even as investors navigate a complex mix of geopolitical tension, shifting economic momentum, and policy uncertainty. While this may appear surprising at first glance, the underlying picture is more balanced than headline levels suggest, as beneath the surface, leadership has shifted from growth to value stocks without a major drawdown, and despite sharp price action in software stocks.
Taken together, sentiment measures suggest equities are not stretched despite hitting new all-time highs. We remain neutral on risk, as the impact of the Iran conflict on the rest of the world remains a big unknown.
At the same time, fourth-quarter U.S. GDP growth clocked in at 1.4%, well below consensus expectations of 2.8%. However, the government shutdown weighed on the economy, with government spending subtracting 0.9 percentage points from growth. Real private domestic demand, a measure of GDP growth that excludes government expenditure, net exports, and inventories, rose by a respectable 2.4%.
So, U.S. economic fundamentals are still strong, and they also seem to be improving in the rest of the world. That is a key reason for a relatively muted market reaction to the Iran strikes.
- Operation Epic Fury
- A More Positive Scenario is Also Possible
- A Global Oil Shock?
- Does It Matter?
- A Positive Supreme Court Ruling
- Regional Fed Surveys Confirm Growth Momentum
- Housing and the Consumer
- A Stronger Renminbi
- Our Portfolio Positioning
Operation Epic Fury
The U.S. chose to pursue regime change, rather than more selective strikes, and targeted Iran’s leadership as well as military capabilities and likely government sites, although the extent of damage is unknown.
But it is now clear that the Supreme Leader Ali Khamenei has been assassinated. Iran’s Foreign Minister Abbas Araghchi has said that Iran’s retaliation is not controlled by the leadership in Tehran. Instead, military units have become “independent and somewhat isolated” and are operating on pre-issued general instructions.
President Trump has said that he is open to negotiating with Iran, that the U.S. attacks are ahead of schedule, but that he also thinks the conflict could last up to four weeks.
A clear objective of President Trump is a ‘Regime Calibration’ outcome that is, at least since the Venezuela operation, President Trump’s favourite foreign policy. Unlike the “regime change” wars undertaken by the Bush and Obama administrations. The current military operations do not actually seek regime change. Instead, they seek to change regime behavior, to calibrate the current regime. There has been no regime change in Venezuela, but President Trump has certainly changed the tone of the relationship between Caracas and Washington.
Iran’s initial retaliation is aimed at countries across the region and damage so far is limited, but it is likely we see more damage in the coming weeks. It’s likely that Iran will continue to retaliate aggressively, such that the full extent of the war and full damage are not yet decided or known.
War is tragic and none of us can foresee the full consequences of these events. But this war is not random or unforeseen.
A More Positive Scenario is Also Possible
And if the military action only lasts four weeks and it does lead to an Iranian regime alignment? That scenario would be quite positive for the global economy and global markets. It would take away a geopolitical risk. It would open the door for fewer sanctions on Iran, which could mean more oil supply, and lower oil prices going forward, which would benefit China the most. But it could also open up the Iranian economy, which would open a new market for mostly Chinese and European companies. On top of that, lower oil prices will positively impact inflation expectations. All of this would be positive for global equity markets.
Another positive side effect of the U.S.-Israel attack on Iran, is that it is another reminder for Europe to get its house in order and invest in its economy and security. Which reinforces our positive stance on Europe.
A Global Oil Shock?
The problem with this regime alignment scenario is that it requires willingness of the other side. Iran is likely to be willing to negotiate, particularly as Israel and the U.S. continue to impose severe pain on the country, its leadership, and infrastructure. But the process will not be smooth and initially Iran will retaliate aggressively. It has already effectively shut down the Strait of Hormuz using the combination of drone technology, with three ships hit so far, and GPS spoofing that has forced ships to drop anchor. While Iran’s ballistic missile attacks on Gulf states and Israel have been largely ineffective, the fact of the matter is that the Strait of Hormuz is shut. This does give Iran perhaps their biggest negotiation leverage.
A potential regime collapse in Iran could see the country break up into warring factions. Potentially threatening shipping in the Strait of Hormuz for months, if not years. The world may need to completely rebuild oil production and transportation infrastructure in the Gulf.
If a major oil supply shock occurs and harms the global economy, then the Trump administration will suffer negative political ramifications, albeit achieve a long-term U.S. national security objective of undermining or destroying the Iranian regime and reasserting dominance in the Middle East. The oil rally is likely to continue in the near-term since this conflict is likely to expand before it ends.
Does It Matter?
Since 1970, every U.S. recession, excluding the pandemic downturn, was preceded by a sharp rise in oil prices. The price of oil is up 24% year-to-date. That said, the current oil price is still only 8% higher than the average for all of 2025. If oil prices stay broadly where they are, the impact on the U.S. economy should be limited. There are three reasons for this.
First, the U.S. economy is a lot less dependent on oil. This is partly because the U.S. uses more natural gas and renewables in its energy mix than in the past. But more so because the economy’s overall energy intensity has declined.
Second, inflation expectations remain well anchored. The stability of inflation expectations limits the need for the Fed to hike rates in response to higher oil prices.
Third, the U.S. has become a major exporter of crude oil and LNG itself. This benefits the U.S. directly by raising export revenues. It also benefits the rest of the world indirectly because U.S. shale producers can increase production to offset declines elsewhere.
For Europe and China, the impact might be bigger initially. But Europe has already proven that it can adjust its energy supply chain. And although China is currently buying 90% of Iran’s oil, it accounts for only 15% of its oil imports. But China clearly has an incentive for this conflict to end soon and for the Strait of Hormuz to be reopened.
A Positive Supreme Court Ruling
It almost seems like old news, but it has been only two weeks since the U.S. Supreme Court voted 6–3 to strike down a broad set of Trump-era tariffs, ruling against the Trump administration’s use of sweeping tariffs under the International Emergency Economic Powers Act (IEEPA).
Nevertheless, President Trump retaliated swiftly, invoking Section 122 of the Trade Act of 1974 to impose a temporary 10% global tariff, and then increasing it to 15%, largely preserving the current effective tariff rate. However, the measure is temporary and will require Congressional confirmation after 150 days. There will likely be a lack of appetite to vote for tariffs ahead of the midterm elections, constraining President Trump’s ability to push through already unpopular trade policies at the expense of affordability, which remains the key issue for voters. And given that Trump has already voluntarily cut tariffs on a range of goods in his renewed focus on affordability issues, it is likely that the overall tariff rate will come down.
In the short run, federal tax revenues will fall by 0.5%-1% of GDP, causing a slightly larger budget deficit and some upward pressure on bond yields, as neither President Trump nor the Republican Party is willing to raise revenue through new legislation.
On trade policy, Trump will attempt to save face politically by threatening new trade restrictions, whether non-tariff measures under IEEPA or tariff measures under other trade laws. But these will not be as sweeping as the tariffs just shot down, since the president will need to limit any punitive trade measures to suppress inflation ahead of the midterm election.
Corporate sentiment should receive a boost. The reason is that tariffs are essentially a tax on American consumers. And removing (part of) that tax will be positive for the economy. And potentially lower inflation, which would allow the Fed to continue to cut interest rates.
The even better news is that checks and balances are still in place. In the long run, the Supreme Court preserved the trust in U.S. assets by reasserting the rule of law, separation of powers, and checks and balances.
Regional Fed Surveys Confirm Growth Momentum
The Dallas Fed survey, as well as the Philadelphia and New York Fed surveys, signalled expanding manufacturing activity alongside disinflationary pressures. The broader U.S. data trend shows improving momentum across both soft and hard indicators after the 2025 slowdown. Historically, such positive momentum has coincided with equity outperformance versus bonds.
Before recommending greater risk exposure from our neutral equity allocation, we would want to see how the Iran conflict plays out over the weeks or months. Even war can be profitable for companies, but investors should account for the ongoing rotation and favor more value-focused sectors relative to growth sectors.
Housing and the Consumer
One of the more constructive developments is the improvement in housing affordability. Falling mortgage rates have revived refinancing activity and strengthened household balance sheets. This translates directly into increased disposable income and spending capacity.
Mortgage rates dropped to the lowest level since September 2022. Freddie Mac’s latest Primary Mortgage Market Survey, released Thursday, showed the average rate on the benchmark 30-year fixed mortgage fell to 6.01% from last week’s reading of 6.09%. The average rate on a 30-year loan was 6.85% a year ago.
“This lower rate environment is not only improving affordability for prospective homebuyers, but it’s also strengthening the financial position of homeowners,” said Sam Khater, Freddie Mac’s chief economist. “Over the past year, refinance application activity has more than doubled, enabling many recent buyers to reduce their annual mortgage payments by thousands of dollars.”
This means that households will have more money to spend on other things, which will be a positive for the economy. This could be a key driver of the U.S. economy going forward, as capital expenditure (CapEx) in AI starts to slow.
A Stronger Renminbi
China remains central to the global economic outlook. Its large trade surplus reflects continued competitiveness, but policymakers have increasingly emphasized the need to rebalance toward domestic consumption.
At the World Economic Forum in Davos, Chinese Vice Premier He Lifeng said the following: “On top of being the world’s factory, we hope to be the world’s market too. China has put domestic demand on top of its economic agenda this year and is working faster on an income-growth goal for both urban and rural residents, to vigorously boost consumption and make itself a consumption powerhouse on top of a manufacturing powerhouse.”
A gradual appreciation of the renminbi would support this transition by boosting household purchasing power, reducing pressure on capital outflows, and easing trade tensions. For the global economy, this would represent a healthier and more sustainable equilibrium.
An appreciating currency can reduce external imbalances by shifting the economy from exports to consumption. For China, this is not just about macroeconomic maturity. It is about geopolitical sovereignty. It is in Beijing’s national interest to have a stronger, more self-reliant economy.
A gradually stronger currency would support this shift by increasing household purchasing power and reducing reliance on exports. It could also help ease trade tensions and contribute to a more balanced global economic system.
For the U.S., a slightly weaker dollar versus the Renminbi would support U.S. exports and nominal growth, benefiting both economies over time.
Our Portfolio Positioning: What to Do?
This is not a simple environment. Geopolitical risks are real, political cycles are noisy, and technological change is reshaping economies at an unprecedented pace. Yet markets and economies are proving more adaptable than many expected.
Our task is not to react to every headline, but to remain anchored to fundamentals and diversify intelligently. For the remainder of 2026, we remain cautiously optimistic, alert to the short-term risk, but confident that disciplined portfolios can continue to compound through uncertainty.
In our core portfolios, we have a slight defensive tilt, with an overweight in healthcare and in Europe and emerging markets. Given the structural economic factors, we remain comfortable with the current positioning. In the coming weeks or months, we do expect heightened market volatility as markets will adjust to new information. We will, of course, follow markets closely, but for the moment, we are comfortable holding our current positions.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
