Adaptability on Full Display

We retain the view held since late February that we do not expect Middle East tensions to materially impact pre-conflict corporate profit momentum or credit availability for businesses or consumers. While in the near term higher costs emanating from the conflict have more widespread effects, we emphasize the more regional implications.

The three largest capital market factors arising from the conflict are consumer and business confidence, interest rates and energy price risks. We will cover consumer and business activity and interest rate policy vis-à-vis the Federal Reserve later in this piece, but energy prices, in the face of relatively constant demand, may be a more durable risk given uneven production and distribution capacity around the world.   

The Europe- and Asia-specific energy implications remain important, and we continue to note divergences within regional hydrocarbon prices. For example, Dated Brent crude oil, which benchmarks the current price of a barrel of oil in the North Sea, reached $144.46 just before the initial ceasefire announcement. While it dropped below $100 following the ceasefire, Dated Brent is still nearly double the price it was at the year’s start. At their peak, UK and German natural gas prices more than doubled from their pre-crisis levels and, while they have retreated from those peak levels, they remain elevated.

Higher energy costs can crowd out other spending, and it can also alter service dependability. With its clear energy cost sensitivity, the global airline industry has been vocal in recent weeks regarding profitability risks for short-haul routes, especially within Europe and “feeder” routes. Pre-conflict, it appeared European governments were becoming more comfortable with additional spending. For example, Germany’s defense and infrastructure bill that passed in March 2025 set an important pan-European tone. However, with Europeans already paying large value-added taxes on petroleum products, on top of the risks that persistently high energy prices may crowd out other consumer spending, we will continue to closely monitor how those regions with energy dependencies counteract sticky hydrocarbon costs. 

The Fed remains in the news, making headlines ahead of an important meeting next week. On Friday, the Department of Justice (DOJ) ended its Federal Reserve building renovation probe; an investigation first shared with markets in January. In addition to an overhang on Fed members, the probe inhibited the confirmation path for Fed Chair Nominee Kevin Warsh, with Republican Senator Thom Tillis vowing to hold off on confirmation proceeding participation until the DOJ investigation was closed. With Warsh on Capitol Hill earlier this week for a Senate Banking confirmation hearing (not formal confirmation proceedings), today’s news comes on the heels of senators questioning Fed independence and Warsh’s predilection for lower rates.

Capital markets tend to eschew theater and, at least in the very near term, investor focus is on what the Fed may prioritize, whether conflict-induced inflation risks or the labor market concerns espoused at last year’s Jackson Hole economic symposium. At the last Fed meeting, which concluded on March 18 during the throes of the Iranian conflict, Fed members emphasized balanced risks with respect to inflation and employment. The Fed also released its Summary of Economic Projections, with the median expectation of one rate cut for the rest of this year.

We expect the Fed to emphasize one word in its statement release next week and the commensurate press conference: optionality. Longer-term interest rates, which the Fed does not control directly, remain somewhat elevated relative to their recent history and, coupled with higher energy prices, act as a consumer headwind — especially for stubbornly high mortgage costs. The Fed will likely stress its lack of agency with respect to the conflict’s outcome: The conditional peace remains complicated given multiple parties and divisions within parties, and, as discussed above, still-high hydrocarbon prices can crowd out other spending. 

We are more than 25% of the way through S&P 500 earnings season as of Friday, with the next two weeks offering a flurry of activity. Thus far, earnings growth is up a whopping 25%, and sales growth is close to 10%. The materials and technology sectors, while still early in their respective release schedules, stand out for their strength, while consumer discretionary is the only sector to demonstrate year-over-year earnings declines — but has several more companies yet to report. Surprises, which are outcomes notably different from consensus forecasts, are limited on the sales side, but earnings surprises for tech, materials and communications are in the double-digit range, and the same applies to energy, which makes intuitive sense.

As discussed in these pages, expectations were high coming into this earnings season. And with several weeks to go, the trend thus far has been for upside revisions to both sales and earnings, with a few companies (travel and airline-related) suspending guidance due to conflict-related opacity. On balance, however, the word we would still use is “adaptive” when describing both business and consumer trends. As noted, we continue to monitor for the risk of weakening credit across cohorts, which currently exhibits a muddling through, if not showing outright strength. 

Pre-conflict, investor attention appeared to rotate away from technology, with major tech indices unable to make new highs since late October. Since the Iranian tensions began, U.S. technology stocks have demonstrated meaningful outperformance relative to the S&P 500 and to international equities, small caps, mid caps, and every other major sector — including energy. This outperformance has occurred despite fears of artificial intelligence obfuscating software companies, potential data center overbuilds, and a litany of other concerns.

We make two key observations. First, the tech “ecosystem,” including inputs for semiconductor buildout, data centers, and hosting and storage, continues to attract capital — and demand is real. That doesn’t mean demand is infinite, but it does mean that public and private companies, governmental entities and consumers are seeking productivity enhancements through technological innovation. Earnings reports from Taiwan Semiconductor, SK Hynix, Intel, Tesla, SAP and others have highlighted their spend on high-bandwidth memory, routine chips, robot build and rethinking enterprise software positioning. All of these require significant spend.    

Second, markets have been very discerning with respect to the potential winners and losers across both equity and debt markets. This is a material divergence from the dot-com era, when rising or falling tides lifted or sank all boats. Seeing individual companies held accountable for strategic and financial decisions is a healthy development. We would have concerns if this differentiation dissipates, but, thus far, it is intact. The ecosystem will not be built to the sky, and some of the more sophisticated entities within the technology-build are already preparing for an eventual overbuild. But for now, we are seeing a healthy convergence of capital accountability for players on both the demand and supply sides of the equation.

¹ American Express: Investor Relations. Accessed 24 April 2026.