�۶���Ƶ

Video: CIO's Thomas Wacker on whether US fiscal policy is at a breaking point (8:03)

Global risk sentiment turned more cautious early Tuesday as the Israel-Iran conflict extends into a fifth day. There was some initial optimism on Monday after the Wall Street Journal reported Iran was seeking to end the conflict and restart nuclear negotiations with the US. That confidence faded after US President Donald Trump left the G7 summit in Canada early, and later called for the evacuation of Tehran in a social media post without providing context. Subsequent reports indicated that Trump had summoned his national security council to meet him upon his arrival, with the US president later saying his early G7 exit was due to “much bigger” reasons than a potential ceasefire.

Israel and Iran continue to launch missiles at each other, with an Iranian state media building struck during a live broadcast on Monday and Reuters reports of “massive explosions” north of Tel Aviv on Tuesday. Rhetoric also remains heated, with Iranian state media warning of a potential “major blow” to Israel if it persists with its campaign. Israel, meanwhile, claimed it had killed Iran’s new armed forces chief of staff, and has not publicly indicated any interest in seeking a ceasefire.

While the situation will likely continue to inject uncertainty into global markets, we believe investors should avoid abrupt changes to their long-term investment plans for several reasons:

Geopolitical volatility is often short-lived. While Israel-Iran escalation risks are real, and downside scenarios warrant consideration, history suggests the impact of geopolitical conflicts on markets fades quickly. Even if military exchanges between Israel and Iran were to continue in the days and weeks ahead, we think markets would remain fairly calm barring a more significant disruption to regional energy infrastructure or shipping lanes. In the past 11 major geopolitical events, the S&P 500 averaged just 0.3% lower one week after the event and 7.7% higher after 12 months.

Although a G7 trade breakthrough didn’t materialize, more deals are likely. While markets had hoped for more positive trade outcomes from the G7, the lack of any major breakthroughs (aside from the incremental UK-US progress) is unsurprising. President Trump’s preference for bilateral deals made the consensus-driven G7 an unlikely venue for significant agreements, in our view. The summit notwithstanding, the US has recently signaled its desire to accelerate negotiations with major trade partners. While more twists in talks are to be expected and sector-specific tariffs could rise higher still, we believe the White House will keep tariffs at levels that avoid triggering an outright recession or severely disrupting trade and US fiscal revenues.

Fundamentals will come back into focus. While the Israel-Iran conflict remains a key risk, it is not the only driver for markets. In the US, the Senate Finance Committee has unveiled proposed changes to the “One Big Beautiful Bill Act,” with further amendments likely. Politico reports significant Republican pushback from across the party, raising the prospect of more delays and protracted negotiations. The lack of a rubber stamp could actually further soothe market concerns over US fiscal sustainability, which has been apparent in both declining yields and calmer Treasury auctions. Although we see little political will to cut the deficit, the US’s structural advantages and the likelihood of ongoing financial repression should keep the debt burden manageable, in our view. Separately, the Fed may opt to avoid too dovish a shift in its commentary at its upcoming policy meeting, given inflation risks from volatile oil prices and trade uncertainty. Our base case is for policy easing to resume in September, though we think this will be contingent on weaker labor market data.

So, while there could be more market swings as events in the Middle East unfold, we encourage global investors to keep a long-term perspective anchored in a diversified, balanced portfolio. Heightened volatility can present opportunities to gradually increase exposure to equities through a phased approach, in our view. We also continue to view both medium-duration quality bonds and gold as effective portfolio stabilizers. Gold, in particular, has historically delivered high-teen percentage gains during episodes of regional geopolitical conflict.

We suggest investors also consider alternative investments like hedge funds and private markets assets, which may offer uncorrelated returns, help dampen portfolio volatility, or capitalize on market inefficiencies. That said, investors must also consider the specific risks around alternatives, including potential illiquidity during times of market stress.