1.1 The fog of war versus the force of earnings

What people commonly say about the weather in April could this year be applied to markets and politics as well: it seemed as if everyone did what they pleased. In the Iran war numerous red lines were drawn and ultimatums issued, only for them to evaporate again shortly after. A ceasefire was agreed, at least, and it has held reasonably well to this day. At the same time, however, one blockade of the Strait of Hormuz became two after the United States decided no longer to allow ships with links to Iran to pass through. This did not help the oil price, which retested its recent highs. And, unsurprisingly, this pushed bond yields higher again, meaning that central banks no longer have grounds to cut interest rates.

The U.S. Federal Reserve also appeared to be following a capricious April script. Jerome Powell broke with previous convention by remaining a Fed governor even as he is about to hand over the Fed chairmanship to Kevin Warsh. He believes this will better shield the Fed from the whims of the current U.S. administration.

While the Iran conflict cast a shadow over the markets for government bonds and energy, equity markets did what they always like to do: they went up. Especially in recent years, that has been their strong inclination whenever the market has suffered a setback. And therefore today’s generation of equity investors and traders is accustomed to the idea that buying the dip usually pays off – either because central banks are ready to fire if markets are in serious trouble, or because investors know how important rising equity markets are to the current U.S. administration.

The earnings season was the excuse for April’s mega rally – even as the Iran war went on. Over one third of European companies and more than half of U.S. blue chips have reported their results and analysts are so enthusiastic that they have sharply revised up their earnings estimates for the current year. Consensus now expects earnings growth for 2026 of 15% year on year in Europe and 20% in the United States.^[1]​ At the beginning of the year the figures were just 13% and 14%, respectively. In Europe the improved outlook is driven almost exclusively by the energy sector, while in the U.S. technology stocks are a second source of strength. Among the latter, only capital investment plans are growing faster than earnings. Last autumn, consensus still assumed that the largest investment wave for data centers would have taken place in 2025, with only relatively modest growth in 2026. But estimates are now pointing to capex growth of 50 to 100%. In concrete terms, the six largest U.S. hyperscalers alone are expected to invest more than 700 billion dollars this year, making a substantial contribution to overall investment volumes and economic growth.

Overall, it could be argued that bits and bytes – AI – have triumphed over molecules – oil – in April – at least on the stock market. In the analogue world, however, a number of commodity shortages are still likely to emerge over the summer.

1.2 A tale of two cities: equities surge ahead, bonds and commodities tell a different story

Several long-standing records were broken in April, not all of which will have pleased investors. Equities were the clear winners. The S&P 500 recorded a gain of 10.5%, its best performance since November 2020. Emerging markets did even better, with the MSCI EM Index rising by 14.7% as geopolitical concerns eased and semiconductors rallied, reflected in a hefty 38.4% increase in the Philadelphia Semiconductor Index, SOX.

For bondholders the month was far less enjoyable. Shortly before month end, 10-year Japanese government bond yields surged to their highest level since 1997, above 2.5%. UK 10-year yields broke above 5%, their highest since 2008, while corresponding German Bund yields jumped to 3.11%, a level last seen in 2011.

Gold investors also had little reason to cheer. After an outright poor March, when prices fell by 12%, gold remained weak in April, losing around one percent.

The focus of attention, however, remained on oil. On April 17, a barrel of Brent could be bought for “just” 86 dollars intraday; by April 30 it cost 126 dollars. We expect prices to fall back by the end of the first quarter next year, but also to remain above where we had previously expected them. On the futures market a barrel for delivery in March 2027 is trading at around 85 dollars, compared with 76 dollars at the beginning of April.

In mid-May the new strategic 12‑month forecasts will be set as part of the quarterly strategy meeting of the DWS investment platform. In this edition we focus on the shorter-term outlook, which is dominated by the Iran war. How quickly hasty positioning after the outbreak of the war can backfire can be illustrated by the case of South Korea. The Kospi equity index initially lost around one-fifth of its value in early March; South Korea is heavily dependent on oil imports from the Gulf region. The index then traded sideways through March amid high volatility, before posting an AI-driven surge of 40% in April. Amid such volatility it is easy to be caught on the wrong foot.

The questions investors face are easy to frame but difficult to answer. Do they look “through” the uncertainties of the coming weeks and assume normalization of the situation in the Gulf? Or do they consider how likely the reopening of the Strait of Hormuz really is? The different aims of the three parties to the war may make the probability of a near-term reopening quite low. Iran has found it can exert major pressure by blocking the Strait of Hormuz and has little reason to trust the United States or Israel after being bombed twice in the midst of negotiations. Israel has a strong interest in the far-reaching destruction of Iran’s functional capabilities. Meanwhile, the U.S. administration can hardly afford to leave the field without achieving any distinguishable tactical or strategic goal. yet also has an eye on the midterm elections and the potential impact on Republicans’ chances from inflation rises caused by a continuing war. The scenario of an unofficial freezing of the conflict is gaining traction but with the Strait of Hormuz closed this can hardly be called an equilibrium, even if, as modeled recently by the World Bank, diversion strategies can reduce the Hormuz supply gap of 20 million barrels of crude oil per day to around 5 million barrels. The IEA expects a supply gap of 3.7 million barrels per day in the second quarter, which would be the largest deficit ever recorded. However, according to the Agency, this could already turn into a supply surplus again in the third quarter if the Strait reopens. At present, however, the closure constitutes a major supply shock. Now both the Iranians and the Americans are blocking Hormuz. And while a barrel of Brent crude cost USD 60 at the beginning of the year, intraday prices surpassed USD 125 on April 30.^[2]​

Across asset classes the market is performing a balancing act between these two perspectives of swift reopening versus persisting closure. Equity markets have been determined to be optimistic, with corporate earnings surprisingly strong and conviction taking hold that U.S. corporate earnings will be little affected by the war. Commodity and bond markets, however, are cautious. We see equity markets as being well supported by the medium-term economic outlook and earnings growth, but valuations could begin to suffer if inflation rates and bond yields fail to stabilize.

2.1 Fixed Income

Bonds have suffered much more than equities from the Iran war. Higher oil prices are a big worry for central banks. We believe that the Federal Reserve will delay interest rate cuts– we still expect two cuts, but we might not see them in 2026 anymore. The European Central Bank (ECB) meanwhile has communicated that it is now leaning towards interest rate increases rather than cuts, in order to keep inflation expectations anchored. Any ECB meeting now could produce a hike. But we still expect lower bond yields overall on a 12-month horizon. For corporate bonds we remain selective and neutral, as spreads are again very tight.

Government Bonds

Torn between hopes for a permanent ceasefire and a continued closed Strait of Hormuz, rates are trading with high volatility. In the U.S., monetary policy remains restrictive and the recent rise in yields tightened financial conditions. We went to Neutral on U.S. 10-year Treasuries with a bias towards becoming positive again but we have been positive on 2-year maturities all along. For German Bunds, on the other hand, we prefer longer maturities, 10-years and 30-years, which we have recently upgraded. At the same time, we have reduced 2-year maturities from positive to neutral given the ECB’s inclination to raise rates. We have also reduced Japanese 10-year bonds to Neutral. Although the Bank of Japan (BoJ) decided to keep policy unchanged at the April meeting, the surprise was that three members voted in favor of a rate hike, sending out a hawkish message to the market. In its outlook the BoJ downgraded growth expectations given the supply constraints in the Middle East and raised its inflation expectations. The hiking path should resume once the data is clearer.

Corporate Bonds

We have left corporate bonds largely unchanged at Neutral. After the first ceasefire talks in early April, spreads tightened again close to historical lows both in the U.S. and Europe. New issuance has also resumed after a short period of anxiety, with solid demand offering a positive backdrop. But valuations are high and we remain Neutral.

Emerging Markets (EM)

In emerging markets (EM), sovereign spreads have rapidly squeezed back, broadly mirroring developed market credit, supported by strong technicals and selective resilience, but tight valuations are now limiting further upside, arguing for continued caution and a neutral stance. Asia Credit is supported by strong technicals and investment-grade-focused dip-buyers; spreads have remained rangebound with selective resilience. With near-term optimism largely priced in and downside risks from a prolonged conflict, we believe a Neutral stance remains appropriate.

Currencies

We remain Positive on the euro versus the U.S. dollar. Europe’s currency has moved higher as deteriorating sentiment and diminishing USD safe-haven^[3]​ demand outweigh geopolitical risk. Higher energy costs are increasingly acting as a drag on USD capital flows rather than a source of strength.

2.2 Equities

The reporting season for the first quarter is going ahead very positively on both sides of the Atlantic, but we have made changes to our geographic preferences. Europe is more affected by supply worries from the Iran war, and the U.S. market is benefiting extraordinarily from the AI capital expenditure (capex) boom. We have therefore downgraded Europe to neutral and upgraded the U.S. to neutral. Besides a stronger earnings outlook, U.S. equities also have additional tailwind from potential Fed cuts, even though they may only come in 2027. But hikes are more likely now in the Eurozone. In the absence of renewed military escalation in the Gulf we believe equities might obtain further support from the strong earnings season. But supply constrains from the Iran war could begin to really show up in corporate sales and earnings figures in the second and third quarter. Furthermore, valuations are demanding again, not only for the IT and communications sector, but also for many industrial and materials stocks, which are linked to AI capex.

Within sectors we are looking closely at companies doing business in areas of AI where bottlenecks are persisting. We have moved our stance on the energy sector from positive to neutral as the oil sector has performed strongly in the aftermath of the closing of the Strait of Hormuz. For fossil energy companies, we believe both downside and upside risks from a continued closure or a gradual reopening are now fairly priced-in. Suppliers of regenerative energy, on the other hand, might further benefit from the structural shift in demand.

2.3 Alternatives

Gold

We continue to like gold strategically. Several structural drivers, such as central bank buying and concerns about the USD, should persist. On a tactical basis, strong equity performance and higher interest yields might dampen further appreciation.

Oil

In the near term we expect energy prices to remain high as over 10% of global oil production remains off-market. Refining capacity has also fallen. Additional damage to refining capacity in Russia is restricting exports and worsening the shortages of countries that need to import oil products. OPEC+ has agreed to increase its production cap by 188,000 barrels per day from June and the United Arab Emirates has declared that it is leaving OPEC, which should help oil supply after the conflict. We expect higher oil prices to remain for some time, followed by greater supply after the Iran conflict ends, resulting in rapid restocking of global crude inventories.