Geopolitics
China's slowdown coincides with at least a minor global oil shock – a combination we have long feared.
In the short term, there is plenty to be worried about in macro beyond the Middle East. The market was on thin ice before the Iran conflict. In the long term, the base case scenario remains bullish, but the war in the Middle East needs to be brief.
Middle East hostilities have triggered risk-off moves and pushed oil prices higher. Previous geopolitically driven oil price disruptions suggest that speed, persistence and equity market vulnerability relate to the degree of the market sell off. At the other end of the spectrum, energy stocks should benefit, but have already rallied significantly.
The global drive to build a resilient ex-China rare earth supply chain is accelerating. It has emerged as a strategic priority and is backed by both public and private sector investment in many countries.
In this Special Report, we argue that rare earth adjacent plays present a more attractive opportunity for investors looking to gain exposure to the rare earth capex cycle than a pure-play strategy.
Oil price risks remain skewed to the upside over the near term as geopolitical risks continue to dominate.
Nevertheless, we ultimately expect bearish fundamentals to reassert themselves over a six-to-12-month timeframe and drive oil prices lower.
The actions of the Trump administration have dominated the headlines over the past month. They are all noise. Focus on the reactions from the rest of the world. Policy makers outside of the US are now determined to stimulate and reform their domestic economies. Global growth is accelerating without a corresponding increase in inflation. This combination is not only positive for risk assets but is also supercharging returns for Ex-US stocks. Downgrade Fixed Income and duration.
Recent economic data have been reasonably firm. We will cut our 12-month US recession probability to 40% from 50% if the Supreme Court strikes down President Trump’s tariffs. This would take our scenario-weighted year-end 2026 price target for the S&P 500 to 6375 from 6200.
Our top five "Black Swan" risks this year are familiar but all too realistic in the current climate. Investors should stay overweight US equities and EM-ex-China until some hurdles are cleared.
Europe is in a geopolitical sweet spot. Exaggerated fears of Russian military aggression and abandonment by the United States, as well as increased competition from China, create a geopolitical imperative to stimulate, reflate, and reform. Taken together with fading cyclical headwinds, it suggests that European risk assets can continue to outperform US ones on a cyclical investment time horizon. Remain long European stocks, in particular industrials, and EUR/USD.
After 250 years, the USA is still the biggest thing happening in the world. But it faces huge challenges in the coming decades from socioeconomic imbalances and strategic competition.