Hi YXI friends,

The narrative around the US-Iran negotiations received a positive spin on Monday. While there was the initial perception that the talks collapsed in Islamabad, JD Vance went on TV to suggest that Iran simply needed more time to consider the terms, rather than a total breakdown.

However, the US blockade of the Strait of Hormuz has begun, which will further cut off the Iran-associated tankers too. The blockade, if effective, could stop ships from moving oil to China and Southeast Asia.

The equities market seems to be looking past the current crisis to a resolution, as the S&P 500 is now just 1% away from the all-time high. This is in the face of persistently elevated oil prices and rates no longer pricing in cuts for the year.

Is the equities market right?

There are two bullish factors to consider here. From the liquidity tailwinds we track - including the credit market and the Treasury General Account - there has been a genuine increase in risk appetite and potential loosening of liquidity going into May. This should help equities recover over time. Plus, yields and oil prices have recently stabilised, which has become less of a shock to the stock market.

Secondly, S&P 500 earnings growth remains robust, at an estimated 12.6% pace for Q1 and 17% for the year as a whole (FactSet). All else equal, the stock market should grow by double digits in 2026, at least on par with the historical trend.

However, the downside risks remain, which is why our models are still cautious. A persistently high oil price and a fertiliser supply shock can reduce personal consumption (less money to spend after food and fuel). They will keep inflation data high and deter the Fed from cutting rates, thereby tightening financial conditions and keeping borrowing costs elevated. Finally, they can raise the input costs of goods, thereby reducing profit margins.

Therefore, if the War were a quick one-time shock that doesn’t deter growth, we are probably fine, but if the Strait closes for months, the stock market could have underpriced the above risks.

DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

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