Had we been told on April 1st that equities would deliver a 10% return over the month, the proposition would have sounded like an April fool’s joke. This would have been particularly so given persistent geopolitical tensions in the Middle East and a progressively uncertain macroeconomic backdrop. Nevertheless, financial markets posted strong and broad-based gains in April, led by Emerging Markets, Japan, and the technology sector.
The 10% rebound in US equities (S&P 500), which lifted the index above its January 2026 all-time highs, has been notable, if not perplexing. Within a span of three weeks, the market shifted from oversold to overbought conditions. Investor sentiment moved rapidly from extreme pessimism to marked optimism, and the VIX declined to more normalized levels around 18%.
Consistent with recent previous episodes of financial stress, markets entered a sustained upward trajectory once peak fear subsided. The announcement and subsequent extensions of a ceasefire, alongside prospects of peace negotiations, enabled investors to refocus on corporate fundamentals. With approximately 60% of companies of the S&P 500 index having reported, earnings growth stands at a robust 30%. Performance has been particularly strong among large-cap constituents, notably within the Technology and Communication sectors, suggesting a renewed confidence in the AI theme. Meanwhile, economic activity has remained resilient despite elevated oil prices: PMIs continue to signal expansion, US GDP growth reached 2.0% quarter-on-quarter in Q1, and major central banks have maintained stable policy rates.
That said, current market optimism appears to understate the potential macroeconomic impact of the ongoing energy shock. Both headline and core inflation are likely to rise further in the coming months, while growth is expected to decelerate. Importantly, the disruption extends beyond energy markets. Constraints and rising costs in inputs such as helium, urea, and sulphuric acid are affecting global supply chains. Agricultural output is likely to be adversely impacted due to higher fertilizer prices during the planting season, implying upward pressure on food prices. In energy markets, early signs of strain are visible through localized gasoline rationing, sharply higher airfares, and flight cancellations.
The duration of the closure of the Strait of Hormuz remains the key variable. The longer the disruption persists, the more pronounced the impact on global demand and economic activity. Current consensus, including IMF projections, already reflects weaker growth expectations. Risks remain skewed to the upside for inflation and to the downside for growth. While maintaining exposure to the upward trajectory of equity markets, we must recognize that the energy crisis—widely deemed unprecedented by experts—may entail significant economic repercussions that appear insufficiently priced in.
