From the studio

Podcast: Monday latest on Iran-Israel escalation, Fed/SNB, and trade talks (4:16)
Video: CIO's Thomas Wacker on whether US fiscal policy is at a breaking point (8:03)

Thought of the day

Group of Seven (G7) leaders are convening in Canada today with the Israel-Iran conflict likely top of their agenda. US tariffs and the ongoing war between Russia and Ukraine are also expected to feature heavily during the summit.

The challenges faced by top politicians are creating an uncertain environment for global investors, with markets responding late last week to the escalation in Middle East tensions and remaining vulnerable to negative trade headlines. Global equities fell, while oil prices surged after Israel launched strikes against Iran on Friday. Gold also benefited from safe-haven flows.

However, markets stabilized on Monday despite exchanges of missile strikes throughout the weekend. Asian equity benchmarks rose modestly, and S&P 500 futures are up 0.4% before the US market open. Gold has retreated from Friday’s high, while the rise in oil prices has moderated.

History shows that the impact of geopolitical events on equity markets tends to be short-lived. During the past 11 major geopolitical events, the S&P 500 was on average just 0.3% lower one week after the event and 7.7% higher 12 months later. If the conflict remains contained mostly to Israel and Iran, markets should soon turn their attention back to underlying macroeconomic and policy fundamentals, which we believe remain supportive for equity gains over the next 12 months.

Ongoing trade negotiations should yield positive headlines. While details on the US-China framework agreed in London were limited, markets have welcomed efforts to restore the trade truce between the world’s two largest economies. US Commerce Secretary Howard Lutnick also suggested more deals with other trading partners are forthcoming. We anticipate additional twists and turns in ongoing trade negotiations, and expect more sector-specific tariffs to emerge. But we also believe that the Trump administration wants to ensure the eventual tariff rate does not lead to a full-blown recession for the US economy or a collapse in trade that undermines the country’s need for a predictable revenue stream to finance an expansive legislative agenda.

Worries over mounting government debt, which pushed yields higher, have been easing. The "One Big Beautiful Bill Act," which the non-partisan Congressional Budget Office projects would raise US debt by an additional USD 3 trillion over the coming decade, is making its way through the Senate. Amid rising investor concerns about the trajectory of US debt, term premia for long-term US Treasuries have started to edge higher. Debt worries are also a concern for equity investors, given their impact on financing costs and the implications for future tax levels. That said, the level of market anxiety has moderated in recent weeks, after yields moved sharply higher at the start of May. Recent auctions of US Treasuries have pointed to a calmer mood among fixed income investors. While political will to cut the deficit is lacking, the combination of the unique advantages the US enjoys and likely financial repression means that the debt burden remains manageable, in our view.

Secular growth drivers should underpin longer-term equity gains. We believe the US economy will benefit from several secular trends, with artificial intelligence (AI) acting as a key catalyst for economic growth. The McKinsey Global Institute has estimated that AI could increase labor productivity in the US by 20-40% by 2030, translating to an annual GDP growth boost of 0.8-1.4%. Globally, PwC estimates that AI could contribute up to 14% additional GDP growth by 2030. Further upside could come from increased capex on power and clean energy, as well as faster growth and increased spending from the “silver economy.” We retain strong conviction in the long-term potential of these Transformational Innovation Opportunities.

So, while short-term market swings in response to news headlines look set to continue, we caution against taking major portfolio decisions due to uncertainty. We think increased near-term volatility enables investors to gradually add to global equities, while medium-duration quality bonds and gold should help enhance portfolio resilience.