Mid East Conflict
Acute geopolitical risks, like a massive oil shock, may be abating. But structural geopolitical risk remains high and could upset a blithe market. Cyclical economic risks are underrated as the US slows down and China continues to stumble. Investors should book some profits in anticipation of tariff implementation and a downturn in hard economic data.
President Trump’s big beautiful bill will pass but faces near-term hurdles and will not tighten the government’s belt. It will combine with renewed tariff implementation to generate near-term risk for both the bond and stock market. The Iran crisis fizzled, saving Trump from a major oil shock that could have derailed his second term.
Even if Iran tries to revive talks, the US has an irresistible opportunity to dismantle its nuclear program. Tactically, investors should favor Treasuries over the S&P, defensive sectors over cyclicals, energy stocks over cyclicals, and US stocks over European stocks in the near term.
Israel’s attacks on Iran will continue until Iran is forced to strike regional oil supply to get the US to restrain Israel. That may not work. Investors should prepare for a broader economic impact of the conflict.
Investors should hold gold, build up some cash, tactically overweight US equities relative to global, and prepare for at least minor oil supply shocks – possibly major shocks – as the Israel-Iran war escalates.
Erdogan's rule continues to decline. Social unrest will persist, governance will erode, and the macro backdrop will deteriorate further. We recommend underweighting Turkish assets.