Financial markets continue to be guided by corporate fundamentals and developments between the United States and Iran. Today I wanted to share some thoughts on current geopolitical challenges, the United States and China summit, and the recent swing in bond yields.

The macro landscape over the past few years has been shaped by a steady succession of shocks, ranging from inflation with sharply higher interest rates to geopolitical conflicts and tariffs. Although each episode has presented substantial risks and uncertainty, the global economy has so far absorbed these setbacks without tipping into a downward trajectory. The post pandemic expansion, now in its sixth year, has proven exceptionally durable, though repeated disruptions may be leaving the cycle more sensitive to new shocks.

The latest challenge is a sharp rise in oil prices stemming from the United States and Iran deadlock. At present, the key question is whether this disruption proves temporary or evolves into a more prolonged supply imbalance. Without a diplomatic breakthrough that reopens the Strait of Hormuz, oil supply could gradually tighten as inventory run lower. In that scenario, the risk of a renewed upward pressure on oil prices and inflation would rise meaningfully while also weighing on market growth, particularly as seasonal energy demand builds into the summer travel period.

President Trump’s visit to Beijing produced a constructive shift in tone between the United States and China. Both sides described the meetings favourably, with China characterizing the relationship as entering a period of constructive strategic stability. Discussions reportedly included Chinese purchases of U.S. aircraft, agricultural products, and energy, along with potential adjustments to tariffs and technology export controls.

The details remain under negotiation, leaving investors cautious about what will ultimately be implemented. More importantly for markets, the meetings did not appear to deliver significant progress on enlisting China’s help to reopen the Strait of Hormuz. Still, the near term benefit is that the trade truce is expected to continue, reducing the risk of another escalation between the world’s two largest economies.

As we wrap up the first quarter earnings season in the U.S., it has provided important fundamental support for equity markets. After declining in March in response to the United States and Iran conflict, U.S. equities have rebounded meaningfully. A reduction in fears about a catastrophic Middle East scenario supported sentiment, but it has been earnings that have done much of the heavy lifting.  

Corporate results broadly exceeded expectations, and forward profit estimates have continued to move higher. However, profit momentum remains uneven. Technology and AI related companies continue to drive much of the uplift in earnings expectations, while the energy sector has been boosted by higher commodity prices. That concentration is not necessarily a concern as long as financial results continue to validate it. But with valuations largely reflecting a favourable outlook, markets will likely require continued earnings delivery to sustain upward momentum. 

Global bond yields have risen meaningfully in recent months as markets have reassessed the high risks of inflation and central bank policy following the recent oil price shock. The U.S. 10-year Treasury yield has risen by about half a percentage point since late February, reaching 4.56 percent at the time of writing this letter, while the Canadian 10-year Government of Canada yield has risen by a similar amount to 3.58 percent.

When inflation pressures rise, bond yields tend to adjust higher to reflect a more uncertain outlook. For investors, the increase in bond yields has created near term downward pressure on bond prices, but it has also improved income opportunities going forward. That said, we remain mindful that higher borrowing costs could pose significant risk to household spending, a key pillar of the economy.

Despite uncertainty around energy markets clouding the macro backdrop, corporate fundamentals have continued to provide an important source of support for risk assets. Positive earnings momentum have helped equity markets digest a lot of uncertainty this year. Nevertheless, since profit growth ultimately depends on stable economic conditions, we remain attentive to the possibility that a prolonged energy supply disruption could create more meaningful headwinds in the months ahead. In our view, portfolios should remain balanced in diversified exposures to navigate a wider range of outcomes.