Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms
Mike Cho, Senior Research Analyst, Nasdaq Capital Access Platforms
Tony Kristic, Senior Research Analyst, Nasdaq Capital Access Platforms
Piecing together the macro mosaic
- A palpable change in sentiment following the temporary two-week ceasefire between the U.S. & Iran as the markets (and world) averted the worst-case scenario in the interim
- Few safe havens since the start of Iran war amidst tighter financial conditions & higher market volatility. U.S. equities tend to appreciate after VIX reaches 5th quintile of readings since 2000
- Consensus 2026 global GDP growth forecasts broadly unchanged. 2026 EPS growth still expected to increase sequentially across most U.S. sectors & globally
Summary
When investors do not have an edge during periods of heightened market volatility and geopolitical uncertainties, it is better to avoid any rash portfolio decisions. This approach held true as the markets (and the world) were on the precipice leading up to the U.S.’s April 7th deadline before escalating the Iran war. While concerns over the negotiation process and ceasefire uncertainties are likely to persist, there was a massive sigh of relief in the interim following the initial agreement for a two-week cease fire and the scope of reopening the Strait of Hormuz to loosen the largest oil supply disruption in history (per IEA).
Entering the sixth week of the Middle East conflict, it had been challenging for investors to find a safe haven asset. Precious metals sold off with the USD rising, and inflation and deficit concerns sent Treasury 10-year yields to over 4.40%—highest since mid-July 2025. Higher U.S. rates and a stronger USD tightened financial conditions, further impacting risk assets and market sentiment—before loosening after the ceasefire announcement.
After outperforming by more than 2 standard deviations on a relative basis over the prior six months as of the end of February, international equities underperformed U.S. equities since the start of the Iran war. There has been a step-up in equity volatility, but it is far from the panic mode of last April. Recent levels put it in the top quintile of readings going back to 2000—levels from which 3-month forward returns for U.S. equities have been positive by 5.5% on a median basis.
Per our prior piece, the markets had effectively priced out a Federal Reserve rate cut in 2026 and were pricing in at least two rate increases by the European Central Bank (ECB) and the Bank of England (BoE) as short-term inflation expectations jumped due to higher energy prices. Following the cease fire agreement the night of April 7th, Fed fund futures are back to pricing in nearly a 25% probability of a Fed rate cut by December 2026 (as of this writing), while swaps have pared back rate hike expectations by the ECB and BoE.
The world and markets are now watching 1) the fragility of the ceasefire and whether it can hold, and 2) if the strait will begin to safely reopen and loosen a bottleneck through which an estimated 30% of global seaborne oil trade and 20% of global LNG trade passes (per IEA). The prospects of resuming more normalized operations sent WTI and brent crude oil lower by around 15% and 12%, respectively, on April 8th, fueling fixed income markets globally as rates fell. The concern had been that the longer the strait was closed, the narrative for the global economy would likely move from higher energy prices being an inflation risk to becoming a more pronounced growth risk. In which case, central banks would likely not be in the business of raising rates.
Turning to the more medium-term fundamentals, March’s U.S. nonfarm payrolls surprised to the upside (+178,000 vs. consensus of +65,000, unemployment rate fell 0.1% to 4.3%). This was largely driven by a balancing out from the February report which fell by a revised -133,000 due to idiosyncratic factors such as strikes and poor weather. Stepping back, the U.S. economy is still adding jobs. But job growth has decelerated and the private sector has been entirely driven by healthcare and education hiring since the end of 2024.
We will be watching as more March data comes out and how this impacts 2026 global GDP growth forecasts which have remained steady despite the Middle East conflict. Given the flat lining of consensus GDP forecasts, to us, this is not yet reflecting the risks from higher energy prices globally. As a more real-time indicator, the Atlanta Fed’s “Nowcast” GDP is portending for less than 1.5% annualized real GDP growth for Q1. Encouraging for market fundamentals, the broadening of 2026 EPS growth expectations across sectors and regions remains intact as investors monitor for any impacts to earnings outlooks on account of the Iran war as Q1 earnings season begins.
Biweekly Chart in Focus: Global cross-asset performance YTD & since start of Iran war
Source: Bloomberg. As of April 8, 2026. In USDs. Notes: U.S. Cyclicals vs. Defensives are ex-energy & materials.
Details
Shifting market sentiment
Per our Biweekly Chart in Focus above, across this universe of global asset classes, only a handful of areas have seen positive returns since the start of the Iran war. Equity and fixed income markets alike have produced negative returns for investors since then, though they benefited from the notable rebound on April 8th. While risk assets have sold off overall since February 28th—and even more so through April 7th—the declines have not been egregious. Even at their recent nadirs, equity market levels were likely not fully reflecting the downside risks from the prospects of higher inflation from the spike in energy prices and the scope for lower growth—similar to the benign 2026 GDP forecasts which we discuss later. This dynamic likely reflected market expectations that the worst-case scenarios would ultimately be averted.
As we outlined previously, the sell-off in international equities relative to U.S. equities has been notable and largely driven by imported energy reliance, the headwinds of a stronger USD, and investor preference for U.S. corporate fundamentals (e.g. earnings outlooks, profit margins). International equities had outperformed by +2 standard deviations on a 6-month rolling basis relative to U.S. equities immediately preceding the Iran war at the end of February (Figure 2). Given the massive outperformance of U.S. equities (Figure 3), this international equity outperformance has only occurred a few times over the past 10 years. While a small sample set, after international equities have outperformed U.S. equities by at least +2 standard deviations relative to the average over the past 10 years, international equities have, on average, underperformed by -4.3% over the ensuing six months.
Figure 2: U.S. equities tend to relatively outperform after international equities outperformed by more than +2 standard deviations
Source: Bloomberg. As of April 2, 2026.
Figure 3: Rolling regional equity 3-year returns
Source: Bloomberg. Notes: based on monthly returns as of March 31, 2026. In USDs.
A key tenet for risk-taking is financial conditions. With the appreciation of the USD, higher U.S. rates, and a widening in U.S. corporate credit spreads, measures of U.S. financial conditions have tightened both in real-time and on a more smoothed out, year-over-year basis per Figure 4. While there is a notable loosening in financial conditions relative to a year ago in the most recent readings, this is a function of lapping the tariff tantrum time frame in April 2025 when financial conditions seized up (Figure 4).
Figure 4: U.S. financial conditions had tightened YoY
Source: Bloomberg. As of April 7, 2026
A component of the U.S. financial conditions index is U.S. equity volatility. In Figure 5, Bloomberg notes that when the VIX is in the fifth quintile of readings since 2000, the forward median 3-month return for U.S. equities is 5.5%. The VIX hit 31 on March 27th—an elevated reading by historical standards, but certainly not panic mode. By comparison, VIX was 52 on April 8, 2025—the day prior to the initial tariffs being rolled back by the Trump administration which led to a historic equity rally on April 9th. However, it is not always a smooth path to these higher forward returns: the max drawdown in the lowest quintile bucket was -23.4% beginning in January 2020 (Covid-19 period) while the max drawdown in the highest quintile bucket was -29.6% beginning in September 2008 (Global Financial Crisis).
Figure 5: Median forward 3-month U.S. equity returns by VIX quintile since 2000
Source: Bloomberg
GDP & EPS forecasts: holding steady
U.S. economic activity has remained resilient despite the heightened macro uncertainties over the past 14 months. Despite a clearly decelerating hiring backdrop over the past four years (Figure 6), monthly job growth has still been positive enough for an unemployment rate of 4.3%—in line with the average over the past 12 months. This has supported the broadly solid U.S. economic backdrop.
Figure 6: U.S. nonfarm payroll growth has decelerated
Source: Bloomberg, Labor Department, J.P. Morgan Asset Management
However, it is critical to look past the headline figures. Figure 7 shows that private sector job creation has been entirely driven by healthcare services and education since December 2024. We would also add that March’s average hourly earnings rose by 3.5% year-over-year—the smallest increase since May 2021. Consequently, while the monthly employment reports have generally been “good enough”, the labor market will remain in focus for the markets and the Fed outlook when factoring in the deceleration of job growth, two industries accounting for all of the private sector growth, and slowing wage growth.
Figure 7: Healthcare & education driving all of U.S. private job growth
Source: Bloomberg, Labor Department, The Wall Street Journal
Broadening our lens, Figure 8 shows the Bloomberg median consensus forecast for 2026 real GDP growth across major economies. Economists are in wait-and-see mode for how the Middle East conflict pans out. As a proxy of deteriorating near-term U.S. economic expectations, Figure 8 also shows the Atlanta Fed’s GDPNowcast indicator for expected Q1 U.S. real GDP growth.
Figure 8: 2026 Real GDP growth forecasts in wait-and-see mode, but U.S. Q1 tracker has weakened
Source: Bloomberg. As of April 7, 2026. Notes Atlanta Fed GDPNow is designed to provide a “nowcast” of the official GDP estimate prior to its release by estimating what the current quarter’s real GDP growth would be based on the latest economic data already released. On a QoQ annualized basis.
A critical unknown variable for the markets has been the duration of the war underpinning elevated energy prices which, in turn, could weigh on global economic activity and earnings outlooks—though net energy exporting economies are likely better buttressed. Per The Budget Lab at Yale, Figure 9 below illustrates how the U.S. economy has become increasingly insulated to spikes in oil prices historically. In the 1975 to 1989 time frame, the estimated total impact to real GDP from a $10/bbl oil price increase over the ensuing eight quarters was -1.74%. From 1990 to 2006, it was -0.94%. In the post-fracking period of 2011 to 2025 (excluding the Covid-19 period of 2020 and 2021)? Essentially no impact. This is not to suggest that there will not be any impact to U.S. economic activity from the current episode as WTI crude oil is still higher by around 62% year-to-date as of this writing. But more to illustrate how technological advancements over the decades have enabled the U.S. to become energy self-sufficient.
Figure 9: U.S. cumulative real GDP response to +$10/bbl oil shock during different periods
Sources: The Budget Lab, Federal Reserve Bank of St. Louis, Känzig (2011).
Consistent with what has been a wait-and-see approach for real GDP growth forecasts, a key underpinning of the equity outlook is the expected broadening of U.S. sector and international EPS growth rates. Looking at the latest EPS growth forecasts (Figure 10), we have not seen material decelerations for these outlooks which feeds into the supportive outlook for equities over the next 6- to 12-months. This tells us that the market volatility and the recent risk-off tone has been driven more by the pricing in of uncertainties and not a drastic altering of the fundamental outlook, yet.
Given the still lofty earnings growth expectations, there is room for some softening should the aforementioned tighter financial conditions coupled with the elevated energy prices begin to weigh on outlooks. It will be crucial for investors to scrutinize EPS growth and revisions trends for any changes to outlooks, perhaps as soon as companies start releasing guidance in the coming weeks.
Figure 10: U.S. sector & regional EPS growth estimates for 2025 & 2026
Sources: FactSet, Bloomberg. As of April 2, 2026.
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