Flows through the Straight of Hormuz (SoH) have yet to meaningfully improve, but financial markets have taken this bout of uncertainty in stride.

Talks, Tensions and Conditional Resilience

 Despite mixed signals, the trajectory of the U.S.-Iran conflict has changed little over the past two weeks. Diplomatic efforts are ongoing and tensions around the Strait of Hormuz (SoH) continue, but importantly, the ceasefire has largely held. This week’s ceasefire extension by the U.S. is a constructive step, providing more time for a durable resolution and the eventual normalization of traffic through the SoH.

Financial markets have displayed notable resilience. Equities have rebounded to pre-conflict levels, while bond yields and oil prices have retraced modestly. Taken together, markets appear to be interpreting the conflict as a short-lived supply shock—primarily affecting energy prices—rather than a catalyst for a broader economic slowdown. The underlying assumption is that economic expansion continues, supporting corporate fundamentals, albeit with uneven effects across major economies.

While markets have shown an ability look through near-term uncertainty, the geopolitical backdrop remains fluid and less-than-favourable outcomes remain plausible. Following the sharp recovery in asset prices, I would expect a period of digestion. For markets to build on recent gains, three conditions will likely need to be met: (1) stability in the ceasefire alongside improving vessel flows through the SoH; (2) economic data continuing to show the economy is absorbing the energy shock without a material growth slowdown; and (3) confirmation of corporate earnings strength.

Earnings Strength Outweighs Uncertainty

In recent years, equity markets have grown accustomed to looking past unexpected events, focusing instead on fundamental drivers. Early results from the Q1 2026 U.S. reporting season support that stance. Both the proportion of companies exceeding expectations and the size of those “beats” are running firmly above historical norms so far.

Large U.S. banks led off with broadly positive results on the back of strong trading and capital markets revenues. Subsequent reports across communication services, industrials, and consumer sectors have shown similar trends, underscored by solid earnings delivery and measured guidance. Together with resilient economic data, these results suggest that both businesses and consumers have thus far weathered recent geopolitical disruptions better than initially feared.

Attention now turns to the Big Tech firms reporting later this month. Given their outsized contribution to recent earnings revisions, trends in artificial intelligence (AI) investment and demand for compute will be key to shaping market sentiment.

Canadian equities have also held up well. While the bulk of the domestic reporting season is still ahead, earnings forecasts for the S&P/TSX Composite have moved higher from already solid expectations of mid-teens growth coming into the year.

Canada’s Untapped Potential

The disruption in the SoH has sharpened the focus on energy security, motivating buyers in Asia and Europe to accelerate efforts to diversify supply away from the Middle East. Canada, with its deep resource base, stable institutions, and reputation as a reliable producer, is well positioned to benefit.

Canada is the world’s fourth-largest oil producer and the fifth-largest natural gas producer. Yet more than 90% of our oil and natural gas exports flow only to the U.S. Canada also ranks second in uranium production at a time when nuclear power is regaining traction. Beyond energy, Canada holds significant reserves of copper, nickel, cobalt, and lithium—key inputs for global energy transition (electrification) and advanced manufacturing—as well as global leadership in potash, a critical agricultural input.

The Carney government has taken steps to convert these opportunities into growth. Last year, the Major Projects Office was established to prioritize the development of strategic infrastructure, including LNG terminals, critical mineral mines, and clean electricity systems, with other initiatives aimed at streamlining approvals. While execution will take time and require sustained investment, the alignment of global demand, Canada’s resource wealth, and a more proactive policy framework increases the likelihood that Canada can translate long-standing potential into tangible economic growth.

Takeaway

Markets are currently balancing resilience with uncertainty. While investors have shown a willingness to look past geopolitical stress, the rapid recovery in valuations suggests that a relatively benign outcome is increasingly discounted in prices, leaving less room for disappointments should near-term developments fall short of expectations.

Tim