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The Middle East conflict remains highly fluid, with Israel accusing Iran of breaching a US-negotiated ceasefire. Israel's defense minister, Israel Katz, said he had instructed the military to "respond forcefully" against targets in Tehran, while Iranian state media denied that the country had breached the truce. This followed an announcement on Monday from US President Donald Trump of a “complete and total” ceasefire between Israel and Iran.

Signs that the ceasefire was not holding did not immediately undermine the positive mood in markets. S&P 500 futures, which had pointed to a 0.8% gain in the index prior to news of renewed hostilities between Israel and Iran, were initially unaffected. The price of Brent crude is around 3.3% lower at USD 69.15 a barrel at the time of writing—down from a peak of around USD 78.9/bbl late last week—suggesting investors do not expect the conflict to disrupt energy supplies.

This follows a 1% rise in the S&P 500 on Monday after Federal Reserve Vice Chair Michelle Bowman said she would support lowering the policy rates as soon as July “to sustain a healthy labor market.” Futures markets now imply a 22.7% chance the Fed will cut at its next meeting on 30 July, up from a 14.5% likelihood a day earlier.

The market response to the escalation and subsequent ceasefire hopes aligns with our view that geopolitical shocks have tended to have a temporary impact on global financial markets, and that investors are likely to refocus on fundamentals. We continue to believe solid fundamentals will help lift equities over the next 12 months.

Fed remains on track to cut interest rates later this year. Having in recent months appeared skeptical of the need to ease monetary policy, Bowman’s comments were unexpected. They also followed similar remarks from Fed Governor Christopher Waller last Friday, when he said policymakers should be looking to lower rates as early as next month as he doesn’t expect tariffs to boost inflation significantly. Markets will be watching for further clues from Fed Chair Jerome Powell later today as he testifies before Congress. Our base case is for the US central bank to resume easing, starting in September, as economic activity slows. Fed rate cuts in non-recessionary periods have historically been favorable for equities.

The eventual US effective tariff rate should not lead to a US recession. Investors are likely to return their attention to the ongoing trade negotiations as the 9 July deadline for the pause in “reciprocal” tariffs approaches. Recent progress appears to be limited, but Reuters reported that Japan’s negotiator Ryosei Akazawa is arranging his seventh visit to the US for as early as Thursday. While we do not expect a straight path ahead for trade deals to be reached, we think the US economy remains on track to expand this year. Treasury Secretary Scott Bessent has also indicated an extension of the pause is possible for countries that are negotiating with the US “in good faith.”

Structural shifts in AI, energy infrastructure, and health care may offer durable, secular growth. Innovation remains key to long-term equity gains, and we expect artificial intelligence (AI), electrification, and longevity to drive over 50% of global corporate profit growth in the next decade. Global AI capex is likely to grow a further 33% next year to USD 480bn after an estimated 60% jump this year, while accelerating power demand amid expanding data center capacity requires significant investment along the power and resources value chain. The longevity market is also expanding rapidly, with health care, wellness, and related sectors poised to capture a growing share of global profits as populations age.

So, while geopolitical developments may inject fresh volatility into the markets, we encourage global investors to keep a long-term perspective anchored in a diversified, balanced portfolio. Volatility could present opportunities to gradually increase exposure to global equities through a phased approach, in our view. Investors can also consider structured strategies for more defensive positioning.