Seven weeks of war, and (not) a bit wiser

In an almost perfect V-shaped formation, the recouped the losses it suffered after the U.S. and Israeli attack on Iran between March 30 and April 14. How does this square with developments on the ground? From a positive perspective, the Iran war appears to be on a path of military de‑escalation, and high-level talks between Iran and the U.S. are taking place. From a negative perspective, however, U.S. war objectives remain unclear; the less negotiation‑inclined Israelis are not seated at the table, and the Strait of Hormuz remains largely closed. This, too, can be interpreted positively: the blockade imposed by the U.S. primarily forces China, which sources 80% of its oil imports from the Gulf, to play a more active role in the peace negotiations. As a result, the conflict could shift from the more unpredictable military arena to the economic one, assuming, and this is the hope, that the Iranian regime gives in to economic pressure. After all, it was primarily the economic situation that drove people onto the streets of Tehran in early 2026.

At the same time, the Iranian leadership’s willingness to accept further suffering among the population should not be underestimated if the terms of any agreement are deemed unattractive. Not least, the experience of the past twelve months, during which Iran was bombed twice while negotiations were ongoing, is likely to have severely undermined trust in the other side. How a lasting compromise, for example on the nuclear issue, can be achieved is difficult to envision. We therefore do not rule out the possibility that, in the run‑up to the U.S.–China summit in mid‑May, the conflict may merely be frozen on an informal basis. Put differently: despite the ongoing military de‑escalation, the further course of the conflict still holds considerable potential for surprises.

This brings us back to the initial question: does the performance of the S&P 500 reflect only the course of the war? We do not think so. Other (positive) drivers have come into play: a solid start to the first‑quarter earnings season, as well as ongoing upward revisions to sales, investment and usage figures in the AI sector, combined with convincing product launches. As a result, S&P 500 earnings forecasts for 2026 have been raised by five percent since the start of the year.^[1]

Market reactions since the outbreak of the war, equities vs. bonds

Cynics might offer a simple explanation for market movements since the beginning of March: investors have simply looked to history for guidance. As Figure 1a shows, since 1945 the S&P 500 has, on average, reacted to geopolitical events almost exactly as it has this time. Despite all the justified doubts about the value of averaging structurally unpredictable conflicts, this arithmetic has nevertheless worked this time. This may, of course, also reflect the fact that the U.S. (and thus U.S. equities) is relatively little affected by conflicts in which it plays a central role. As Figure 1b illustrates, the has performed significantly worse since the outbreak of the war than the , which, helped by the renewed focus on the already strong AI theme, has recently once again overtaken the S&P 500 after a difficult start to the year.

Equity markets have rebounded quickly by historical standards, led by the United States.

A closer look at the individual asset classes, Figure 2, highlights several distinctive features of the Iran war: a) U.S. equity markets have performed best, while the German market ranks among the relative losers. b) Gold has not fulfilled its traditional role as a safe haven;^[2] it was sold off during the market downturn in early March and has yet to fully recover. c) The U.S. dollar has also not fulfilled its usual role as a crisis currency, which may partly reflect growing global skepticism about the United States’ international leadership. d) Oil prices remain elevated. Prices for immediate delivery are even significantly higher than the contracts for delivery in the coming month shown in the chart. e) Similar to gold, the war is still clearly visible in government bond markets in the form of higher yields driven by increased concerns. What is striking, however, is the relative strength of corporate bonds, specifically high yield, whose credit spreads in the U.S. have fallen markedly.

Different asset classes highlight the distinctive features of the Iran war

2a U.S. equities less affected, but the dollar surprisingly weak

^{Sources: Deutsche Bank AG, Bloomberg Finance L.P.; DWS Investment GmbH; 4/15/2026. Past performance is not indicative of future performance.}  

2b Government bonds weak, credit remains solid

_{*yield/**spread change in basis points. Sources: Deutsche Bank AG, Bloomberg Finance L.P.; DWS Investment GmbH; 4/15/2026. Past performance is not indicative of future performance.}  

Economic and political implications

When assessing the impact, a distinction must be made between capital markets and real economies on the one hand, and between short‑term and longer‑term effects on the other. Equity markets can already be moving higher again, while the consequences of the war only slowly work their way through global supply chains and ultimately show up in corporate balance sheets. We will turn to capital markets in the next chapter.

How our economic forecasts for 2026 and 2027 will change will be published after our regular quarterly strategy meeting in mid‑May. It would come as little surprise if growth projections were revised downward and inflation forecasts upward, all the more so the longer the Strait of Hormuz remains effectively closed. Physical shortages of many commodities are likely to become fully visible only in the coming months. In our view, each additional day of the blockade will further delay the normalization of trade and transport routes. Regardless of the economic cycle, this experience is likely to prompt many players to replenish or even expand commodity inventories, keeping demand elevated. As an immediate consequence of these shortages, we also expect changes in tourism behavior this summer; in particular, more Europeans than usual are likely to stay within Europe.

Over the longer term, we expect a renewed push toward “reshoring,” meaning efforts to diversify supply chains more broadly or relocate them closer to home. To what extent the recent unilateral action by the U.S. will lead existing trading partners to increasingly seek alternatives and reduce their willingness to invest in U.S. financial assets and ultimately the dollar remains to be seen. However, it is broadly undisputed that the Iran war has inflicted further damage on the petrodollar system that has existed for roughly fifty years. Whether the will use this latest, one of many, wake‑up calls more decisively to pursue reforms remains an open question. Hopes may be somewhat bolstered this time by Hungary’s election outcome: Prime Minister‑elect Péter Magyar has said he wants to improve relations with the EU — marking a shift after years in which Viktor Orbán repeatedly used Hungary’s veto power to obstruct EU decisions.

On digital betting markets, developments related to the U.S. midterm elections have already been notable. While markets still assigned a 66% probability to a Republican victory in in February, this has recently fallen to just 46%. That said, we view the market impact as limited, as Trump has, for the most part, already implemented key measures from his stated policy agenda.

Impact on asset classes

Those who find it difficult to reconcile current market developments with the course of the war may recall a typical pattern from past crises (such as during the Covid pandemic or the 2008 financial crisis): markets fall until the point of maximum uncertainty, so‑called “peak fear,” is reached and the highest has been priced in. In the current situation, this moment may have been the day when the U.S. President publicly threatened to “bomb Iran back into the Stone Age.” Since then, markets have been on a path of de‑escalation, albeit without any guarantee that this will ultimately lead to a sustainable and lasting peace.

Independently of this, the current environment appears to be providing equities with more tailwinds than bonds, largely due to persistent inflation concerns. Equities can, in principle, cope relatively well with a certain degree of inflation, as this is reflected in higher prices, revenues and ultimately corporate profits. At least based on the quarterly results reported so far, there are few signs of weakening demand.

That said, the potential risk lies less on the earnings side than on the valuation side. Should yields remain elevated for longer or continue to rise, and not gradually decline as we expect, valuation multiples could come under increasing pressure. Against the backdrop of a war‑weakened mix, it would be understandable for concerns about structurally higher yields to intensify: higher defense spending, rising investment in energy self‑sufficiency, government support packages to cushion high energy costs and potentially lower tax revenues due to weaker economic activity.

Bonds and currencies

Bond markets remain challenging, as the geopolitical shock stemming from the Iran conflict further exacerbates existing trade‑offs in . Central banks must continue to balance inflation risks against slowing growth momentum, a delicate task that leaves rate markets vulnerable to . Accordingly, we remain tactically focused overall and expect near‑term setbacks, even as we anticipate a moderately declining yield environment over the medium term.

In the U.S., we continue to expect rate cuts, but at a later stage than the market had most recently anticipated. The inflation impulse from higher energy prices raises the risk that the prioritizes caution over speed and waits for a clear decline in inflation before acting. Our base case therefore remains a delayed easing, with the main risk being not renewed rate hikes, but a prolonged period of restrictive policy. Against this backdrop, we continue to favor a cautious, tactical approach along the and expect the U.S. dollar to decline, as geopolitical tensions, fiscal pressures and a diminishing safe‑haven appeal are likely to limit confidence in the currency over the medium term.

In the , the monetary policy path is even less clear. While immediate tightening is not our base case, persistent inflation pressure, particularly via energy prices, leaves further options open should second‑round effects emerge. The is therefore in a highly data‑ and event‑dependent position, which favors elevated yield volatility in the near term. Overall, we remain selectively positive on government bonds, while maintaining a neutral stance in credit, focusing on quality, maturity discipline and targeted and    

Equities

Global equity markets have so far reacted relatively calmly to the Iran conflict. Risk assets continue to trade at elevated levels, volatility remains moderate, and market sentiment currently suggests that geopolitical tensions, while a source of risk, are not seen as posing a severe short‑term threat to growth or corporate earnings. Higher oil prices are inflationary but have so far been viewed by markets as manageable, while they may also be providing a partial inflation . The greater macroeconomic uncertainty remains less geopolitical in nature and continues to center on the interest‑rate environment and the question of how durable the “higher‑for‑longer” narrative really is.

Fundamentally, the market backdrop is being supported by a robust earnings season. Profit estimates have been revised meaningfully higher of late, helping to at least partially alleviate valuation concerns. At the same time, there has been a normalization of valuations, particularly in the technology sector: falling share prices alongside rising earnings expectations, especially in software, have lowered aggregate valuation levels, with the S&P 500’s forward temporarily dipping back below 20. AI remains the central structural driver of equity markets, now increasingly supported by tangible monetization, capacity constraints and persistently high investment in AI infrastructure rather than narrative optimism alone.

From a regional perspective, we maintain a positive view on Asia and Europe and a cautious view on the U.S., while we structurally still favor exposure to global AI winners. From a sector perspective, we continue to prefer AI‑related areas such as semiconductors and infrastructure, as well as energy‑ and commodity‑linked segments, which benefit from higher oil prices and currently serve as tactical stabilizers. Energy and materials represent the “icing on the cake,” in our view, complemented by selective exposure to alternative energy and energy infrastructure. We remain constructive on the banking sector, supported by solid results and stable credit metrics, although the overall environment, shaped by geopolitical, political and monetary uncertainty, calls for a balanced and disciplined approach.

Alternative assets

We continue to view gold as an effective diversifier and a potential hedge against geopolitical risks, inflation uncertainty and potential erosion of confidence in currencies.

In oil markets, the short‑term outlook remains fragile given the unresolved situation around the Strait of Hormuz. Logistical bottlenecks, infrastructure risks and potential transport disruptions limit downside potential and make renewed price increases in the short and medium term likely. In our view, crude prices of USD 120 per barrel cannot be ruled out. At the same time, we maintain our view that over a 12‑month horizon the oil market is structurally more likely to be oversupplied, suggesting prices should fall back well below USD 80, provided there is no sustained escalation. Any prolonged disruption, however, would quickly turn oil from a pure energy issue into a macroeconomic one, with corresponding spillover effects on inflation and monetary policy.