Somewhat Quiet on the Front

We have been consistent in our messaging since the conflict began that we do not expect the current Middle East unrest to materially impair the corporate profit cycle or thwart credit transmission to businesses and consumers, two conditions historically associated with capital market challenges. While we remain most focused on the human condition enveloping any conflict, we retain our glass-half-full forward perspective for diversified portfolios. We underscore that work remains to solidify a durable path forward from the current ceasefire.

Most immediately, markets will focus on the U.S./Iran peace talks in Islamabad, Pakistan set for Saturday. Heading into talks, Iran has shared concerns regarding ceasefire term adherence. As of writing, Israel is not expected to participate in the Islamabad discussions, and Israeli/Hezbollah flare-ups risk straining the current tenuous peace. The U.S. opted to convene “hastily arranged” diplomatic talks in Washington D.C. next week, where Secretary of State Rubio will bring together ambassadors from the U.S., Israel and Lebanon following reports of post-ceasefire military activity targeting Hezbollah in Lebanon that prompted Iran’s peace violation claims.¹

From a financial market perspective, oil prices and the Strait of Hormuz’s fate are the key interrelated variables emerging from Saturday’s discussions. We often use the image of a runner on a treadmill to represent the economy and growth, with the treadmill’s ramp offering resistance in the form of higher interest rates, energy prices or other phenomena that can slow the proverbial runner. The economy can endure higher prices for short stints, and should Iran control the Strait of Hormuz and charge tolls (which would represent costs not present en masse pre-crisis) or unsuccessful talks lead to escalated hydrocarbon prices, the capital market’s calm will likely disappear faster than it arrived.

Using one of our favorite adages, “price is truth, at least for the moment,” global capital markets’ reactions have ranged from a nearly 9% rally from March 30’s intraday lows for the S&P 500 to an over 20% decline in many hydrocarbons from highs seen as recently as Tuesday. The dramatic price moves this week were most pronounced for sectors and countries most vulnerable to both a strengthening dollar and higher oil prices as they rallied sharply following the ceasefire announcement. Historically riskier bonds, precious metals and real estate proxies rose, but their reactions were subdued relative to their equity market brethren.  

What we find more instructive is what one can learn about expectations, which are visible in the appropriately named futures markets. For those less familiar, futures markets represent opportunities for buyers and sellers to agree on specified financial asset contract terms in forthcoming time periods. Our aggregate assessment is that while markets have taken a more optimistic breath in the past week, they remain on watch and a “conflict premium” envelopes many assets. In hydrocarbons, brent oil futures prices represent the global oil price benchmark, and futures prices reflect a 13% decline from where prices were the day before the ceasefire announcement for a contract settling in June and a 10% decline for July settlement, but beyond those time periods, prices suggest a conflict premium of greater than 20% relative to where prices stood in early February. Further, emphasizing the conflict’s localized dynamics, natural gas prices in places like the UK and Germany continue to trade at meaningful relative historical premiums to their U.S. counterparts.

Despite their recent strength and surpassing key technical price levels they had given up in the crisis’ early days, equity markets also reflect edginess. Measures of implied volatility, popularized in instruments like the VIX index, which tallies current and next-month option prices for the S&P 500 Index and also has a futures market to gauge forthcoming levels, display lower premiums on average than pre-ceasefire pricing but still-elevated levels from where the market stood pre-crisis. The VIX index currently sits just above its five year average level, with futures prices slightly more elevated.

Recognizing that markets are neither right nor wrong, this cross-asset conflict premium appears justified. No one has an edge on how the negotiations will go, but fundamental consumer and business analysis suggests that activity remains durable. We will have ample opportunities to hear from companies in coming weeks, which is a convenient segue into our next topic. 

While we defer to our talented Northern Trust Economics Team for the house view on economic implications, asset prices and consumer taste preferences remain centered on inflationary considerations. CFOs are thinking through everything from shipping costs, to potentially hedging fuel prices, to how consumers might endure potential price increases. Further, global central banks are currently deliberating their stances amid a fluid global macro backdrop.

The Federal Reserve’s preferred inflation measure, the core Consumer Price Expenditures Index, came in largely in line with expectations when released on Thursday, but still registered at a 3% annualized rate for the third consecutive month. Further, this reading does not capture prices inherent in the current crisis. The Consumer Price Index, released Friday, was also largely within expectations, yet reflected aggregate inflation above 3% (3.3% was the actual release) and stripping out food and energy, 2.6% annualized inflation. Also on Friday, the University of Michigan released its survey data, with respondents anticipating one year inflation to reach 4.8% and 5-10 year inflation 3.4%. All of these numbers exceed the Federal Reserve’s stated 2% objective.

While we expect the Federal Reserve to likely look through the crisis should the ceasefire shift to lasting peace, we have to consider alternative scenarios. Consumers continue to face higher costs, and prospective homebuyers have seen mortgage rates jump from around 6% for a 30-year conforming mortgage pre-crisis to 6.5% as of writing based on national averages.⁵ We continue to expect central banks to emphasize the elevated price environment, and despite the likelihood of a new Federal Reserve Chair in the U.S., it will be a challenging period to promote lower interest rates.

Answer provided by Lynne Kostakis, Executive Director of Alternative Investments, Northern Trust Wealth Management

On Tuesday, Moody’s Ratings downgraded the outlook for the U.S. business development company (BDC) sector. BDCs are vehicles that primarily invest in direct lending, a segment of private credit, and are commonly associated with “evergreen” fund structures cited in recent headlines. It is worth noting that not all private credit is direct lending and not all direct lending is in BDC fund structures.

Importantly, an outlook downgrade is not the same as a downgrade of any individual BDC’s credit rating. Rather, it is a forward-looking signal, similar to a worsening weather forecast, that reflects Moody’s view of sector conditions over the next 12-18 months. Individual ratings broadly remained unchanged.

Moody’s cited several factors behind the outlook change, including the first net outflows from BDCs in early 2026 following strong inflows through Q3 2025; rising redemption activity that could persist; and increased risk to certain portfolio companies, such as software businesses facing disruption from artificial intelligence.

Despite the outlook downgrade, Moody’s emphasized that most BDC ratings remain stable. This stability is supported by portfolios largely invested in senior secured, first-lien loans or those at the top of repayment priority, solid liquidity at the issuer level, and well-laddered debt maturities. As the outlook points to the weather forecast getting worse, both conditions and opportunities may become more uneven across managers, underscoring the importance of disciplined underwriting, strong governance and robust risk management.

We believe it’s important to have an awareness of rating agency changes, but to also not over-index to them. Our expectation is that the markets will reconcile these issues on a fund-by-fund basis rather than escalate them to a systemic issue. Private credit continues to serve an important role in global lending markets, and thoughtfully sourced and positioned opportunities can add value over time. 

¹ U.S. to Lead Ceasefire Talks Between Lebanon and Israel. CBS News. Accessed 10 April 2026.

² Accessed on terminal 10 April 2026.

³ Delta Air Lines to Cut Capacity. Simple Flying. Accessed 10 April 2026.

⁴ American Airlines, Alaksa Airlines Join Other Carriers in Raising Bag Fees. ABC News. Accessed 10 April 2026.

⁵ Bankrate.com data accessed on Bloomberg Terminal, 10 April 2026.