Macro
Macro conditions continue to deteriorate at the margin, with the Iran conflict now clearly feeding through into growth, inflation and confidence channels. The IMF is set to downgrade its 2026 global growth forecast from 3.3%, reinforcing the shift from a modest early-year recovery toward a more fragile, shock-driven regime. Policy guidance remains cautious, with central banks signalling patience and prioritising inflation expectations over immediate reaction to the energy shock.
The dominant macro variable is no longer the conflict itself, but the stability of energy flows. Markets are increasingly focused on the distinction between ongoing military escalation and disruption to the Strait of Hormuz, which remains the critical swing factor for the global economy. While near-term headlines have pointed to a temporary reprieve, this does not resolve underlying tensions. The conflict is increasingly characterised by “reprieve, not resolution,” with structural constraints on both sides suggesting a prolonged period of instability and recurring supply risk.
At the same time, the shock is propagating beyond crude prices into the broader cost structure of the global economy. Rising energy costs are feeding through to refined products, shipping, insurance, and logistics, tightening financial conditions via higher inflation breakevens, nominal yields, external balances, and FX differentials, and increasing dispersion across assets.
Crucially, the shock is not being transmitted evenly across economies, and this asymmetry is now central to the macro outlook. The US enters this episode from a structurally stronger position than most peers. Direct dependence on Gulf energy flows is minimal, domestic production remains high, and LNG export capacity provides both insulation and external leverage. This does not eliminate exposure to global pricing, but it changes the transmission mechanism: for the US, the shock is predominantly a price shock, while for Europe and large parts of Asia, it remains both a price and terms-of-trade shock, directly compressing real incomes and worsening external balances.
This asymmetry matters because of how it feeds through the macro system. For energy-importing economies, higher oil and gas prices act as a direct tax on growth: import costs rise, trade balances deteriorate, currencies come under pressure, and inflation increases, forcing tighter or more constrained policy. The combination of weaker purchasing power and tighter financial conditions leads to a more immediate slowdown in demand and activity.
The US, by contrast, is not immune, but the incidence of pain has shifted. Higher energy prices still weigh on consumers and lift inflation, but part of that shock is offset at the aggregate level through stronger energy-sector revenues, increased capex, and higher export volumes in LNG and refined products. This effectively recycles a portion of the shock domestically rather than fully transmitting it abroad. The result is a more balanced adjustment: consumption slows, but is cushioned by income gains elsewhere in the economy.
The net effect is a clear relative macro advantage. Growth may slow in absolute terms, but less than in other developed markets, reinforcing US outperformance in a global slowdown. This asymmetry also supports earnings durability in energy, infrastructure and defence-linked sectors, a firmer dollar bias as external balances hold up better, and more resilient capital flows into US assets, particularly in risk-off environments.
Incoming data already reflects weakening global momentum. March PMIs declined across most major economies, with several moving toward contraction territory, while growth forecasts for Asia have been revised lower. At the same time, inflation is re-accelerating through energy channels, with US CPI rising toward ~3.1–3.3% and European inflation moving higher, while China remains disinflationary. The aggregate mix is turning stagflationary.
However, the more important signal is the divergence between backward- and forward-looking indicators. Labour market data in the US remain relatively firm, with payroll growth still solid and unemployment stable, suggesting the economy retains a near-term “backbone.” At the same time, forward indicators are deteriorating: real income growth has softened, spending momentum has slowed, and consumer confidence has dropped sharply as higher gasoline prices begin to crowd out discretionary demand.
Policy remains constrained by this mix. Inflation expectations have risen at the short end but remain broadly anchored over longer horizons, allowing central banks to look through the initial supply shock for now. The Fed is likely to remain on hold through 2026, with policy broadly in a neutral range and flexibility limited if growth weakens while inflation remains elevated.
The macro base case, therefore, remains one of continued, but lower-quality growth. The economy is not in recession, but the composition of growth is deteriorating, with pressure building on real incomes, consumption and margins. A prolonged period of elevated energy prices would likely push growth lower and reinforce the stagflationary mix already emerging in the data.
From an asset allocation perspective, this is increasingly a supply-driven inflation regime. Commodities and real assets tend to outperform, while both equities and bonds face pressure if the shock persists, though the adjustment may be self-limiting as demand destruction eventually stabilises inflation and yields.
The broader shift is structural. A Gulf energy shock is no longer a symmetric global event, but a redistributive shock. It weakens energy importers more than it does producers, reinforcing US relative strength across growth, earnings, and capital flows.
In the near term, the path remains binary. Stabilisation in Hormuz flows would allow markets to look through the conflict, while renewed disruption would accelerate the transition toward a more entrenched stagflationary environment. The key question is no longer whether the shock matters, but how it propagates and who absorbs it. On the current structure, the answer remains clear: the rest of the world more than the United States.
Rates
Rates markets are settling into a structurally different regime, where the front end is anchored, but the long end is increasingly driven by inflation risk, fiscal dynamics, and the expansion of the term premium.
Yields moved higher across the curve during the week, with the U.S. 10Y trading around 4.30–4.32% and the 30Y approaching 4.90%. The move remains asymmetric. The front end is largely stabilising after the aggressive repricing seen in March, while the long end continues to drift higher, reinforcing a bear-steepening bias. This dynamic is consistent globally, with more pronounced moves in Europe and the UK, where long-end yields rose 6–10bp in a single session, and in Japan, where the curve also steepened as inflation pressures filtered through.
Importantly, primary markets are confirming the direction of travel. Treasury and global sovereign auctions are clearing at progressively higher yields, even when secondary market benchmarks appear stable. The U.S. printed 3Y at 3.90% and 10Y at 4.28%, both above prior auctions, while similar repricing was evident in Japan and Germany. This divergence highlights a key shift in the market: supply is being absorbed, but only at higher clearing levels, suggesting a gradual yet persistent rise in the required term premium.
Positioning remains cautious. Flows continue to favour the front end, with money market assets near $8T, reflecting a preference for liquidity and carry over duration risk. At the same time, higher starting yields around 5–5.5% are beginning to draw investors back into fixed income, though the extension into duration remains selective. The result is a two-speed market: strong demand anchoring short maturities, while longer maturities require increasing concessions.
The macro driver behind this shift is inflation, particularly its energy component, but the transmission into rates is now broader. Near-term inflation expectations have moved higher, while longer-term expectations remain anchored, allowing central banks to stay on hold. However, the policy reaction function has clearly shifted. Markets have moved from pricing multiple cuts in 2026 to effectively no easing, with only a marginal probability of a cut and intermittent pricing of hikes. Fed communication reinforces this asymmetry, with policymakers increasingly open to tightening if inflation proves persistent.
More structurally, higher energy prices are beginning to feed into fiscal expectations, raising the likelihood of wider deficits and sustained issuance. This is critical for the long end. The market is no longer driven primarily by policy expectations but by the interaction between supply, demand, and inflation risk premia. The term premium is rising not as a cyclical adjustment, but as part of a broader regime shift toward higher volatility and less predictable macro outcomes.
The implication is clear. The front end has largely completed its repricing and remains supported by carry and liquidity demand. Risk is rotating toward longer-dated yields, where continued issuance, elevated inflation expectations, and tighter demand conditions increase the probability of further upward pressure and ongoing curve steepening. The trajectory remains highly path-dependent on energy prices, with persistence sustaining the current dynamic, and any rapid reversal likely to trigger an equally sharp rally led by duration.
Credit
Credit markets remain superficially stable, but the underlying regime is shifting toward a clear two-speed dynamic. Public credit continues to price a benign macro path, while private credit is entering an early-stage correction marked by liquidity stress, confidence erosion, and rising dispersion.
At the index level, conditions remain constructive. IG and HY spreads are broadly unchanged, primary markets are open, and issuance continues to clear with strong demand. This resilience is supported by still-solid fundamentals, particularly in the banking system, where Q1 results were exceptionally strong. Large U.S. banks delivered record profitability, with robust consumer activity, improving delinquencies, and stable credit performance, reinforcing the near-term stability of public credit markets.
However, this strength is increasingly backwards-looking. Beneath the surface, forward indicators are deteriorating. Banks are beginning to guide more cautiously, with net interest income expectations revised lower and provisions rising, while senior management commentary has shifted toward downside scenarios, including explicit references to stagflation risk. The implication is clear: current earnings strength coexists with rising concern about the next phase of the cycle.
The key divergence sits within private credit. Redemption pressure has become the clearest and most immediate stress signal. Large private credit vehicles are experiencing elevated withdrawal requests, in some cases, far exceeding quarterly liquidity gates. This is less a reflection of realised losses and more a function of structural design: limited liquidity, combined with rising uncertainty, leads to queue dynamics in which investors pre-emptively request redemptions to secure future liquidity. The result is a self-reinforcing cycle of perceived stress, even before fundamentals materially deteriorate.
This dynamic is compounded by growing concerns around portfolio composition, particularly software exposure. Many private credit portfolios carry 20–40% exposure to software and adjacent sectors, with some of this risk underreported due to classification across “business services” and similar categories. The emergence of AI-driven disruption has introduced a new uncertainty around revenue durability, raising questions about long-term cash flow stability and refinancing capacity. While defaults remain low, the more immediate issue is valuation: declining equity valuations combined with PIK accruals are driving a silent deterioration in loan-to-value ratios without triggering formal credit events.
Mark’s reliability has consequently become a central issue. The lag between underlying deterioration and reported valuations is creating a credibility gap, with increasing risk of step-change revaluations. This is not yet a solvency problem, but it is a confidence problem, and in credit markets the latter often precedes the former.
The transmission mechanism to broader markets is identifiable but not yet active at scale. The key channel is bank-provided leverage to BDCs and private credit funds. Early indications suggest that banks are becoming more cautious about extending or rolling over these facilities. Should this tighten further, it would force deleveraging through asset sales or capital injections, creating potential spillovers into liquid credit. At present, this remains a contained risk, but the plumbing for contagion is clearly in place.
From a spread perspective, the divergence is equally visible. Public HY spreads continue to price a soft landing, while private credit dynamics are more consistent with a mid-cycle correction. New-deal pricing in core middle-market lending has begun to widen modestly, with spreads ~25–50 bps higher outside stressed sectors. This reflects a gradual repricing of risk rather than a full dislocation, but directionally confirms that credit conditions are tightening at the margin.
Cycle-wise, the market has transitioned into an early stress phase: not systemic, but clearly beyond late-cycle complacency. Defaults remain contained, and institutional capital continues to provide support, but the adjustment is now being driven by valuation, liquidity and positioning rather than realised credit losses.
Positioning should therefore be explicitly selective rather than beta-driven. Tech-heavy BDCs, particularly pre-2022 vintages, remain exposed to further mark deterioration, with the adjustment process incomplete and visibility on underlying asset quality still limited. The discount-to-NAV narrative is premature in this segment until marks stabilise and transparency improves.
At the equity level, retail-heavy alternative asset managers are increasingly vulnerable. The retail AUM growth story has been central to valuation multiples, and recent redemption dynamics directly challenge that thesis. With flows expected to slow for several quarters, the risk is a structural compression in EV/AUM multiples rather than a temporary sentiment shock, as already reflected in sharp price reactions following redemption headlines.
Within credit portfolios, the most acute risk sits in PIK-heavy structures, particularly in legacy software exposures. The combination of accrued non-cash income and declining enterprise valuations is mechanically worsening loan-to-value ratios, creating the conditions for the most severe markdowns even in the absence of immediate defaults. This is the key mechanism driving dispersion and should be actively avoided in current positioning.
Overall, credit markets remain supported at the surface level, but the underlying regime is shifting toward higher dispersion, tighter liquidity, and more complex risk transmission. The convergence between stable public spreads and stressed private credit dynamics remains the critical inflexion to monitor in Q2.
Equities
US equities extended the rebound for a second consecutive week, with the S&P 500 +3.56%, Nasdaq +4.68%, Dow +3.04% and Russell 2000 +3.97%, leaving the index ~2% below its January high. The move was driven by continued de-escalation between the US and Iran, which triggered a sharp unwind of hedges and short positioning. The key macro release valve was oil, with WTI down 13.8%, reversing the war premium and easing near-term inflation risk.
That oil move is critical for interpreting the rally. The prior CPI print was distorted by energy (headline +0.9% m/m, energy +10.9%, gasoline +21.2%), which had pushed inflation risk back into the narrative. The reversal in crude effectively removes that tail risk for now, allowing markets to shift back toward a “core inflation + resilient growth” framework. This is why equities, duration-sensitive assets and cyclicals all moved higher simultaneously, while Energy underperformed sharply (-4.07%).
Cross-asset moves confirm that regime shift. The dollar weakened (DXY -1.3%), easing global financial conditions and supporting EM outperformance (+6.7%), while Asia (+5.7%) benefited from both AI exposure and currency dynamics. The EM story remains structurally intact: weaker USD, commodity leverage and AI supply chain exposure (Taiwan/Korea), with India continuing to anchor growth at ~7.6%. This matters for US equities through earnings translation and capital flows, reinforcing large-cap resilience.
Within equities, leadership remained narrow but pro-cyclical. Consumer Discretionary (+5.81%), Communication Services (+5.80%) and Technology (+4.81%) drove the index, while defensives lagged materially. The important detail is not just sector performance, but factor composition: this was a continuation of long-duration growth + cyclicals, not a broad risk-on across all segments. Software weakness (IGV -7.0%) stands out, highlighting that AI is not a uniform tailwind but increasingly a source of disruption within tech itself.
AI remains the dominant earnings anchor, but the narrative is evolving. Mega-cap strength (AMZN +13.6%, META +9.6%) continues to be driven by visible demand for compute and infrastructure, reinforced by TSM (+35% YoY revenue growth) and ongoing partnerships across AVGO, GOOGL and INTC. However, the second-order effect is now clearer: model improvements (Anthropic, OpenAI constraints, in-house chips) are compressing perceived moats in software. The result is widening intra-tech dispersion, with infrastructure winners and application-layer pressure emerging simultaneously.
Financials added a second pillar of support, but the earnings calls point to a shift in the earnings engine rather than outright strength. Trading and investment banking were the clear upside drivers, with JPMorgan Markets revenue up 20% and IB fees up 28%, while Goldman and Morgan Stanley posted record revenues driven by elevated client activity. This confirms that volatility and repositioning are translating directly into earnings.
At the same time, the core lending backdrop is softening. Net interest margins are compressing (Wells Fargo NIM 2.47%, below expectations), JPMorgan trimmed NII guidance, and only Bank of America showed a clear upward revision (6–8% growth). The implication is that earnings are becoming more market-dependent and less balance-sheet-driven, which increases cyclicality. Banks are effectively telling: the economy is still active, but not accelerating.
Client behaviour reinforces that view. Spending remains solid (card volumes +9% YoY), corporate activity is holding up, and balance sheets are not stretched. But management’s tone has shifted toward caution, with explicit references to a “wide range of outcomes” amid geopolitical and fiscal uncertainty. This is consistent with the broader market: strong current data, but declining forward visibility.
Positioning remains a key driver of the move. ~$30B of CTA shorts still have the potential to flip into ~$34B of buying, providing a mechanical bid into the market. However, this is being offset by weak retail participation, with evidence that dip buyers are selling into strength. This divergence matters; it explains why rallies are sharp but still fragile, with limited follow-through from discretionary flows.
Macro remains the balancing force. Hard data is holding (consumption +0.5% m/m, services expansion intact), labour markets are stable, but inflation signals remain uneven, and sentiment has deteriorated sharply. The Fed is therefore stuck in a reactive stance: not tightening further, but not in a position to ease aggressively either. That caps the upside multiple expansion and keeps the market dependent on earnings delivery.
The key takeaway is that the rally is being driven by three reinforcing but fragile pillars: geopolitical relief (via oil), systematic positioning, and AI-led earnings visibility. Each is real, but none is fully broad-based. Oil has removed a near-term macro constraint; positioning remains supportive but finite, and AI strength is increasingly concentrated. That combination explains both the strength of the move and the continued narrowness underneath it.