Quick Thoughts: A helpful ceasefire, but a fragile pause

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

The US-Iran ceasefire is supportive for markets at the margin, but the new US blockade of Iranian ports means the oil and shipping shock has not been resolved; it has shifted into a chokepoint-risk story. We view the recent market move as a tactical relief rally, not a durable normalization, especially with diplomats still trying to restart talks and shipping conditions through Hormuz still far from normal. Between 15%-20% of the world’s crude oil, natural gas, fertilizer and petrochemicals normally flow through the Strait of Hormuz. The longer the passage remains blocked, the more shortages will push up prices and hinder global growth. Our broader economic outlook remains positive, but more conditional, as we watch employment and earnings growth—and especially inflation pressures. In our opinion, this supports staying invested, while maintaining discipline on quality, valuation and position sizing.

• Relief rally, not resolution: The ceasefire has improved sentiment and lowered near-term escalation risks, but the key issue is whether energy flows and shipping routes—particularly through the Strait of Hormuz—normalize durably. Even without renewed conflict, partial disruption could sustain a geopolitical risk premium in oil and leave markets exposed to renewed volatility. And in some cases—particularly in South Asia and East Asia—the disruption of physical supply, if it persists, could lead to shortages, spiking prices, lost economic activity and even political instability. The status quo is not sustainable if it persists even for a few months.
• Continued earnings growth, higher inflation risk: Artificial intelligence (AI) and data-center capital expenditure, a resilient consumer, tax refunds, tariff clarity and the fiscal backdrop continue to support the US economy. Company earnings have remained resilient, which is the key market support. What has shifted is the balance of risks—inflation is now more likely to surprise to the upside, particularly given firmer energy and input costs, which should keep the US Federal Reserve (Fed) on hold in the near term.
• Inflation broadening beyond oil: The impact of the conflict is already extending into chemicals, fertilizer and industrial supply chains, not just crude oil. Restoring full production capacity will take time. Supply normalization will take months if not years, which means that oil, natural gas and fertilizer prices probably won’t fall quickly back to pre-war levels.
• Fixed income—we favor carry: With inflation firmer and fewer Fed interest-rate cuts likely, we believe carry (the coupon or interest rate) remains more attractive than duration.¹ We would remain neutral to short duration, barring a move in the 10-year US Treasury yield above 4.50%. Rising US fiscal debt and reduced foreign demand for Treasuries suggest to us that longer-term rates are unlikely to decline materially. Within credit, we favor investment grade, remain selective on high yield, and continue to see value in emerging market debt. For US investors, we continue to like municipal bonds.
• Staying broad within equities: Earnings resilience still supports a positive market stance, and we see further upside if earnings hold and geopolitical risk does not materially re-escalate. We continue to see scope for leadership to broaden across some emerging markets, mid- and small-cap stocks, and international equities, especially Japan.
• Volatility is an opportunity: Elevated volatility should also create potential opportunities in options-based, total return and income-oriented strategies. If market volatility increases significantly, we see it as a potential buy signal.
• The AI theme is shifting from the “build it” phase to the “implement it” phase. Large capital spending on data centers continues; AI remains supply-constrained and still requires further investment. Greater AI implementation should create opportunities for more companies to use AI to improve productivity, lower costs and strengthen margins, especially for knowledge-based businesses with leadership focused on implementation.
• We are also watching the pipeline of very large potential initial public offerings around Anthropic, OpenAI and SpaceX. All three are being discussed as landmark offerings, although timing and readiness still appear fluid, particularly in OpenAI’s case. Deals of that scale could absorb meaningful investor attention and capital, at least temporarily, and pull liquidity from other parts of the market.
• We prefer real-economy exposure and pricing power: We favor sectors tied to pricing power, capital investment and structural bottlenecks, including energy and power (supply discipline, rising electricity demand), materials (industrial inputs, restocking), and industrials (infrastructure, automation and defense). Technology remains a core allocation given AI and digital infrastructure demand.
• Private credit: We do not see systemic risk to the economy from private credit. Private credit funds have different software-lending exposures, but managers have generally underwritten these loans tightly and mark positions (determining and recording current fair value) regularly. Recent redemption pressure at “semi-liquid” funds looks more like a liquidity-structure issue than a credit canary (i.e., early warning indicator), reinforcing that these are long-term, illiquid allocations. We continue to favor middle-market direct lending and commercial real estate debt, where constrained bank lending and a large refinancing need should support attractive lender terms, with a preference for multifamily over office space.
   

As investors, we remain optimistic but disciplined. In our opinion, it makes sense to maintain exposure without chasing extended moves, and continue to emphasize quality, resilience and balance sheet strength while staying cautious on more speculative areas. We believe elevated volatility will likely create additional buying opportunities.