From an equity-friendly world to stagflation risk

As we close a tumultuous Q1, markets find themselves hostage to the volatile developments of the war in Iran. The conflict has become the single most dominant driver of asset performances, with a binary outcome (deal or escalation) and violent price swings.Despite brief moments of optimism for a swift resolution, the market's apparent resilience stands in stark contrast to the physical reality: the global economy is grappling with tangible energy and trade shortages, and the high oil (and oil products) premium will persist at least for the remainder of the year even if the war ends quickly. It seems unreasonable not be cautious in the short-run as we see no exit path for peace and plan for reopening the Strait of Hormuz. Volatile consolidation seems the most likely scenario for April, as we fear things can turn worse before they get better.Markets usually work with hot spots…the end of the war is #1, inflation/central banks #2, and growth #3. As for the latter, the difference between slower growth or no growth (ie. high recession risk) will be a huge one. We believe we will not be in the dark scenario. Under our central (best-case) view, which assumes a two-month disruption and the Strait reopening in early May, we anticipate a path for risky assets to recover. This outlook is based on several key assumptions: Brent crude settling near $80 by year-end, central banks proceeding cautiously, and relatively resilient G10 economies absorbing a growth impact of around -0.2/0.3 pp for the US and -0.5 for the EZ. In this scenario, we maintain a constructive view on equities, with a year-end target of 7,300 for the S&P 500.AI is still the #4 hotspot, and we do not subscribe to the recent “AI scare trade”. Tech giants are now cheaper, they are less vulnerable to energy or cyclical shocks, and they have demonstrated their ability to pass through. While a prolonged conflict could favor traditional value and capital-intensive companies, the current entry point on US mega-techs is attractive for navigating the uncertainty ahead.