Weary investors sit on their hands

Investors are wary, even weary, after five weeks of volatility have left markets not far from where they started. Fearful of being whip-sawed by the latest change of direction, they are choosing to sit on their hands and wait for more clarity from the Gulf.

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Another weekend, another shift

As has become the pattern during this conflict, investors were presented with a changing picture over the weekend, while markets were closed. They then cast their judgement when trading resumed on Monday.

The headlines this weekend were, first, the failure of talks in Islamabad to reach agreement over a more durable ceasefire once the current two-week pause ends. Then the US announced that it would attempt to blockade the Strait of Hormuz, in a bid to apply leverage to the Iranian regime and bring it back to the negotiating table.

The market response was predictable. First, oil surged back above $100 a barrel as the US indicated that its tolerance of Iranian exports is waning.

The prospect of higher for longer oil took the wind out of the equity market’s sails. Investors gave back some of the gains they had enjoyed last week as markets rallied on hopes for the Pakistan-brokered peace talks.

Despite the pause for breath, however, markets remain flat or higher year to date as investors cling to the template of previous Gulf conflicts - a short-term spike in oil before a rapid return to the status quo.

Japanese shares remain 14% year to date, while emerging markets are 11% up since January. Here in Europe and the UK, shares are up in the single digits, while US and Chinese shares are flat since the start of 2026.

Meanwhile, the prospect of more expensive oil, and so higher inflation, fed through into the bond market. Yields around the world edged higher, confirming the positive correlation between share and bond prices. The two are moving up and down in lockstep.

Gaining some perspective

With markets edgy but under control, it’s a good time to step back and look at the underlying picture for investors. That’s especially the case as markets gear up for first quarter earnings season, which kicks off this week as usual with a flurry of bank results.

The technical picture remains positive, with markets falling back as the conflict began but never really correcting to an obviously oversold position. AI-focused stocks have maintained their leadership but struggled to carry the rest of the market with them.

The good news is that earnings growth forecasts remain positive. The January to March period is expected to deliver another double-digit growth period, perhaps 16-17%. That has been offset by a reduction in average valuations, down by about 13% from their peak level. Net result: the S&P 500 stands just a couple of percentage points below its recent high.

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In other news…

Attention is unsurprisingly focused on events in the Gulf. But the weekend brought another important development in Europe, as the region’s longest-serving leader - Hungary’s Viktor Orban - was toppled in a landslide rejection of the status quo.

Hungary has long been a thorn in the side of the EU - blocking support for Ukraine and gaining the support of both Russia’s Vladimir Putin and America’s President Trump. Markets broadly welcomed his replacement by pro-EU conservative Peter Magyar, with the Hungarian forint rising by 2% on the news.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.