Highlights
Equity markets entered the summer on a volatile note, as renewed tensions in the Middle East coincided with a sharp reversal in AI-related stocks.
Risks in the Middle East remain elevated. That said, our base case was—and remains—that the conflict will persist without spiraling into a broader escalation, with its intensity varying in response to oil prices. Developments in July were broadly consistent with this view: hostilities intensified when WTI fell below US$70 per barrel, before easing after prices rebounded above US$90.
Persistent disruptions nevertheless continue to undermine hopes for lower gasoline prices, complicating matters for the Federal Reserve and bond investors, as interest rates moved higher across the yield curve over the past month.
At the same time, the pullback in technology stocks appears to reflect a healthy correction of accumulated excesses—particularly the use of leverage in South Korea—rather than a fundamental collapse of the AI investment theme. However, following a period of exceptional returns, some normalization in performance is reasonable to expect, at least among semiconductor companies.
Overall, the current environment points more toward a consolidation phase—one that began in June and could persist for several more weeks—than a genuine reversal of the equity market’s uptrend, which continues to be supported by solid corporate earnings growth.
Bottom Line
For now, our base case remains unchanged, as does our pro-risk positioning. Nevertheless, this status quo should not be interpreted as a sign of complacency. The conditions that continue to support equities have not disappeared, but the reasons to monitor our outlook closely are becoming more numerous.