Geopolitical football vs. big spenders: Are markets offside?

Amid the run-up to the World Cup, markets are facing a global contest of their own—one shaped by geopolitical scrambles, big-money investments, and a game that is increasingly unpredictable.

Investors have been remarkably composed in the face of these crosscurrents, even as twists and turns in the Iran war have complicated the economic outlook. Risk assets have rebounded sharply from a brief setback, with several equity indices breaking out to new highs.

But look beyond the scoreline, and it’s clear the pitch is being reshaped.

A robust lineup—but rising risks

The resilience in risk assets is not without merit. The year began with a strong starting lineup: resilient growth, robust earnings momentum, and supportive financial conditions. Fiscal spending and investment in artificial intelligence (AI) provided further impetus for markets, while recession risks remained low.

AI progress and high-profile contracts have continued to support market optimism. But overconfidence in “fan favorites”—particularly software names—is a growing concern given historic spending by hyperscalers and shifting assumptions over terminal values. Areas of private credit have also raised questions around positioning and risk.

Markets may not be offside, but they could be underestimating how quickly the game can change.

Supply chains: Geopolitical football

The situation in the Strait of Hormuz underscores the degree to which supply chains have become a source of leverage.

While both the U.S. and Iran have incentives to quickly reach a deal and reopen the strait, investors should not write off the possibility of a significant escalation or a prolonged, frozen conflict. The underlying risks are inflationary.

The energy supply shock is significant, global, and asymmetric. Beyond oil, supply disruptions are rippling across diesel and jet fuel, fertilizer, sulfur, and helium.

The jet fuel shock is most acute. Real shortages could soon emerge, which would likely disrupt flights, hamper transportation and tourism, and amplify broader economic pressures.

Analysts on our research platform estimate that traffic through the strait needs to reach one-third to one-half of prior levels to help supply chains normalize. But time is running out to prevent more persistent damage.

Inflation on a yellow card

So far, investors have looked through the corresponding spike in energy prices as temporary—it’s not stopping play just yet.

However, if second-round effects take hold through wages, food, or broader price measures, then inflation risks move from a caution to a red card.

Inflation expectations matter to markets just as much as the initial shock.

As defensive cover, real assets, inflation-linked debt, and gold offer important hedging potential against inflation threats.

Same rule book, different referees

Regional divergence adds complexity to the market outlook.

The U.S. is relatively well positioned, supported by energy independence, fiscal policy, and strong AI-driven investment. As long as inflation expectations remain anchored and second-round effects are contained, the U.S. economy can continue to play through the pressure. Under this scenario, the Federal Reserve is likely to hold the line and may even resume cuts in the fourth quarter.

Europe faces a tougher “fixture list.” As a net energy importer, Europe is more exposed to supply shocks, adding challenges alongside stickier inflation and tight labor markets. This leaves policymakers on high alert and likely to blow the whistle with two rate hikes in 2026.

European equities could consequently play less of a starring role in market performance than they did last year.

A changing rulebook

Many investors have become reliant on policy backstops, expecting authorities to step in quickly to stabilize markets.

But policy stances are turning more defensive.

Just as Russia’s invasion of Ukraine reshaped defense priorities, the Iran conflict is likely to accelerate resource nationalism, energy security, and a focus on strategic supply chains.

Economic policy and national security are becoming increasingly intertwined, reinforcing a shift toward a more fragmented global system.

Star forwards to squad rotation

Importantly, the push to revitalize domestic capacity, together with greater spending on defense and AI infrastructure, will likely drive opportunities beyond the narrow cohort of superstar companies. 

The market broadening we saw in 2025 continued its momentum into this year, highlighting the importance of “bench strength” in portfolios. Emerging markets, value stocks, and smaller companies—the underdogs of recent years—have been larger contributors to returns.

Additionally, the AI opportunity is no longer just about big spenders and skills—it’s also about stamina. What began as an asset-light, software and services theme is now a physical, capital-intensive story. Opportunities have extended into semiconductors, data centers, cooling, power, and infrastructure.

However, relative valuations for U.S. large-cap growth stocks, which tend to be more resilient to high energy prices, have become more attractive and increased the appeal of a barbell-like approach in equities. 

Game plan: Focus on formation

The underlying drivers of bullish sentiment—earnings growth, fiscal support, and AI innovation—are intact for now. But the continued run-up in risk assets and the delicate geopolitical backdrop leave markets vulnerable to disappointment.

Relying less on “individual strikers” and more on formation, discipline, and resilience should remain a durable approach.