What moves the stock markets – the key drivers

The current macroeconomic environment continues to be characterized by heightened geopolitical uncertainty – particularly due to the conflict in the Middle East. In March of this year, the risk premium for U.S. equities rose to 3.7%, while for EU equities it climbed to over 4.5%. This was accompanied by significantly higher volatility as a result of the substantial uncertainty and partially contradictory communication.

The situation calmed down in early April with the announcement of a two-week ceasefire, which prompted the markets to respond with a strong "recovery rally." However, the market environment remains fragile for the time being. It is therefore expected that markets will continue to experience heightened volatility until the ceasefire evolves into a lasting peace agreement and the energy bottleneck at the Strait of Hormuz is sustainably resolved. It remains unclear to what extent the warring parties are willing to negotiate their demands. Until then, the so-called headline risk remains high, and market sentiment is likely to be driven more by news developments than by fundamental factors.

How the macroeconomic and geopolitical environment is shaping up

Our baseline scenario has not changed since the beginning of the conflict: we anticipate a timely resolution in the Middle East. The willingness to negotiate, signaled by the warring parties in early April, supports the expectation of a short-term easing of tensions. U.S. policymakers continue to have a strong interest in limiting the economic and political consequences ahead of the midterm elections in November. Similarly, China is likely pushing behind the scenes for a normalization of energy exports. However, it has also become clear over the course of the conflict that the resolution is not solely dependent on the U.S. The actual progress of the negotiations is difficult to assess, and a sudden resurgence of the conflict cannot be ruled out. A new escalation would prolong the conflict and exacerbate its economic implications on a global scale. Conversely, the full reopening of the Strait of Hormuz could significantly accelerate the stabilization process.

Against this geopolitical backdrop, investors have so far remained relatively calm: the correction in the stock markets has been comparatively moderate, considering the shock to the global energy supply and the historically high valuations. Since the beginning of the conflict (as of April 10, 2026), equities have recorded only limited losses: global equities -1.5%, U.S. equities -0.75%, EU equities -2.3%, and emerging markets -3.6%. The volatility index (VIX) briefly reached levels above 30 points during periods of stress but is currently hovering around 20 points. In short, the market reaction either suggests that no significant consequences for the global economy are expected or that market participants are underestimating the risk of a prolonged escalation.

Which risks are in focus

At the beginning of the year, expectations were relatively optimistic. Despite uncertainties surrounding the potential of artificial intelligence (AI), the announcement of new trade tariffs, and rising default rates in the private credit segment, stock markets delivered attractive returns by the end of February – particularly in Europe (+5.6%) and in emerging markets (+11%).

In March, the market reacted quickly, and stock valuations were adjusted downward. At the same time, the price-to-earnings ratio for U.S. equities, for example, currently (as of April 10) stands at 21, which remains significantly above the long-term average of around 17.7. Notably, analysts have so far made no adjustments to earnings expectations for 2026 and 2027.

The dominant risk for the stock markets remains tied to the question of how long the conflict in the Middle East will last and whether the ceasefire will hold and transition into an agreement. The longer the Strait of Hormuz remains closed or heavily restricted for the transport of oil and gas, the greater the disruption to the global energy supply. The price of Brent crude oil temporarily rose by almost 60% compared to pre-crisis levels and, even after the two-week ceasefire announced in April, still stands at USD 100 per barrel.

An extended period of tight supply and significantly higher energy prices would have far-reaching consequences, such as rising inflation expectations and declining global growth forecasts. In March, U.S. inflation expectations already jumped from 2.4% to 3.3%, while U.S. consumer confidence hit a multi-year low in April. If lower earnings expectations were to materialize, this could lead to further adjustments in stock prices. A de-escalation of the conflict during the course of April, however, could slow down this development accordingly.

Opportunities in Regions and Sectors

At the regional level, the conflict has particularly impacted regions that are heavily dependent on energy supplies from the Middle East. The United States has proven to be more resilient in this regard, benefiting from its status as a net oil exporter and continuing to attract capital as a "safe haven" for investors. Europe and emerging markets, on the other hand, are feeling the effects of the Middle Eastern turmoil more acutely. Emerging markets are suffering from uncertainty over potential economic consequences – including tighter monetary policies – along with a stronger U.S. dollar and the risk of declining global growth forecasts. At the sector level, energy stocks (+11.3%) were clear winners globally in March, while cyclical sectors such as industrials (-10.6%) and materials (-10.7%) were among the losers.

The conflict in the Middle East has also reversed some of the rotations in the equity markets that had been driving returns since the beginning of the year. First, the outperformance of value stocks came to a halt in March. Second, the trend for small caps reversed, with small caps underperforming large caps by 3% in March after showing strong performance for two consecutive months. Third, the reversal of the rotation favored high-quality stocks.

The rapid shifts in the geopolitical news flow require a calm and measured approach in this volatile environment. Looking at our baseline scenario, we consider a neutral to slightly more defensive positioning in equities to be appropriate, focusing on sectors such as consumer staples, utilities, or healthcare. Additionally, a stronger allocation to high-quality companies can help enhance the resilience of the portfolio.

At the same time, the role of AI as a potential structural growth driver remains intact. Semiconductors, networking technology, and data center infrastructure providers are likely to be the main beneficiaries of this investment cycle, which is being driven by the significant investment volumes of major "hyperscalers." In an environment where energy security and independence are becoming increasingly important, the topic of electrification is gaining greater significance.

The ceasefire has provided some relief, although headline risks remain high in the coming days. As a result, the market environment remains fragile for the time being.