One week / one topic: Dissonance

What happened?

After 2 months of disruption in the Strait of Hormuz, the energy shock feels increasingly macro relevant.

The prices of refined products are significantly higher than they were, reflecting both declining inventories and the delayed impact of impaired vessel traffic.

This of course represents a material tax on consumers, and spending growth has already been supported by dissaving rather than income growth.

Consumers seem to agree with equities then, clearly siding with the ‘this too shall pass, and quickly’ camp in the debate around the ultimate impact of the Iran war.

“Don’t be naïve,” – equities seem to say – “Earnings are what matters, AI capex remains the dominant growth impulse and there is endless demand for tokens… Just relax and enjoy the ride, bro!”.

Trying to keep up with the breakneck pace of AI developments, demand does seem to be shifting beyond GPUs to power, memory, cooling, grids, optics, and infrastructure – therefore creating persistent supply bottlenecks and supporting earnings broadly.

That said, the rebound to new highs has been (once again!) very sharp, and earnings revisions have been very concentrated.

Investors have learned that a key feature of Trump 2.0 is ‘escalate to de-escalate’, and risk appetite didn’t even decrease very much this time around.

So here we are, left with an increasingly undeniable macro-relevant disruption and novel source of risk – while equity markets went back to being priced for a rosy future.

What to do, then?

Our observations

• Fundamentals: Judging from recent events, one is tempted to conclude that technicals are all that matters in the near term.

  In other words, sentiment, positioning and flow dynamics can and do trump quaint notions such as valuations on short time horizons. The hard part is knowing when to pick quarrel with all this…

• Price action: Perhaps the tell here is government bond yields, especially the front end of the curve.

  Despite the obvious peril of forcing a ‘bonds disagree with equities’ narrative on recent price action, the fact remains that rates have not reverted to where they were before the war.

• Investor beliefs: Self-fulfilling prophecies are a thing… maybe?

  If enough investors believe that equities can only ever go up and you just need to buy every dip, how does this change actual price behavior?

So what?

Putting it all together, the balance of risks has clearly shifted.

With sentiment full and positioning extended, further equities upside increasingly requires a durable geopolitical and energy resolution – not just incremental positive headlines.

This combination of ‘confidence in AI and growth’ plus ‘complacency on energy and consumer risk’ does indeed feel fragile.

And yet – we might wake up any day to a tweet announcing that this is all over, a deal was done and “let’s all go back to playing with chatbots”.

This uncomfortable balancing act justifies ‘neutral’ levels of risk in portfolios then, I think…?

If anything, owning ‘more than usual’ of the assets we like based on their more attractive fundamentals – select EM and Japanese equities, EM government bonds in local currency – might help maintain a steady hand through all this.

Fingers crossed…

Mood music: Hozier – Take Me to Church

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.