Despite limited clarity around a resolution to the Middle East conflict, markets have remained relatively constructive. We provide some context around the factors supporting investor sentiment, along with recent developments from central banks.

The U.S. and Iran ceasefire remains broadly intact, even as progress has been uneven. With diplomatic channels still active behind the scenes, a negotiated resolution that reopens the Strait of Hormuz remains a reasonable base case scenario, though financial markets appear to have already priced in much of this outcome.

Equity markets have continued to push toward new highs, supported by an economy that has remained more resilient than many expected despite elevated commodity prices. Strong corporate earnings, ongoing AI related investment, healthy consumer spending, and an economy that is structurally less oil intensive than in prior decades have all helped support sentiment.

That said, the current backdrop still feels delicately balanced, with timing remaining the key variable. The longer the Strait remains disrupted, the more pressure gradually builds beneath the surface. Temporary buffers including inventory drawdowns, strategic reserve releases and logistical workarounds have helped soften the immediate impact of supply disruptions. Over time, however, those buffers become less effective, increasing the risk that persistently high energy prices begin to weigh more meaningfully on economic activity and inflation expectations.

This remains one of the reasons we have continued to maintain a relatively defensive posture across portfolios. While markets have shown resilience, the path forward still contains a considerable degree of uncertainty, and we believe preserving flexibility remains important until there is greater clarity around both geopolitical developments and the broader economic trajectory.

The latest round of large technology earnings was closely watched given the group’s outsized influence on market performance and elevated profit expectations. Overall, results were constructive, with most companies continuing to deliver healthy revenue growth, strong margins, and substantial cash flow generation. Investor reactions, however, remained selective, with markets rewarding companies that are beginning to demonstrate tangible returns from elevated AI spending rather than simply higher capital expenditures.

Upward earnings revisions have also helped improve valuations relative to expected growth, though scrutiny will likely persist as AI related investment continues to scale higher. Encouragingly, recent semiconductor earnings have reinforced confidence that demand for AI infrastructure remains robust. We continue to view AI as a compelling long term growth theme, while also recognizing that concentrated market leadership and elevated expectations reinforce the importance of disciplined diversification.

Recent central bank decisions were largely in line with expectations, with both the Bank of Canada and the Federal Reserve holding policy rates steady. Long term inflation expectations remain relatively well anchored, giving policymakers room to remain patient as they assess how the Middle East conflict may influence prices, consumer spending, and business confidence. Since the onset of the conflict, markets have scaled back expectations for near term rate cuts, with investors now anticipating both central banks may remain on hold through several upcoming meetings.

The latest Federal Reserve meeting also marked Jerome Powell’s final meeting as Chair. Powell indicated he intends to remain involved as a governor for a period of time, which may help support continuity during the leadership transition. As Kevin Warsh’s nomination continues to advance, markets may begin paying closer attention to how future communication and policy responses evolve under new leadership. While the Federal Reserve’s broader framework tends to shift gradually, changes in tone and reaction functions can still create periods of short-term volatility as investors recalibrate expectations.

Geopolitical headlines will likely remain noisy as negotiations between the U.S. and Iran continue to evolve. Recent strength in equities has been supported by solid corporate profitability and resilient economic data, though markets also appear increasingly positioned for a relatively smooth resolution. This leaves the outlook somewhat more sensitive to delays or unexpected developments, particularly if elevated commodity prices persist longer than anticipated.

In periods like these, maintaining a disciplined and patient approach remains important. While uncertainty is unlikely to disappear in the near term, staying focused on long term fundamentals while remaining mindful of evolving risks continues to be the most prudent path forward.

As always, feel free to reach if you have any question or want to connect. Have a great weekend.