Why Aren’t Investors More Worried?

Market Reaction to Geopolitical Shifts

• The S&P 500 has recovered to just below pre-conflict levels despite a sharp reversal triggered by news of a U.S. blockade of the Strait of Hormuz following an initial Iran ceasefire agreement.
• Markets appear to be discounting "very bad" tail risks (such as prolonged military escalation or total trade closure) by pricing in a negotiation path that eventually resolves within weeks rather than months or years.
• Dominic Wilson notes that market relief often precedes the resolution of ground-level issues, similar to recovery patterns seen during the early stages of the COVID-19 pandemic and tariff disputes.
• While oil flows remain constrained and oil prices are elevated, the equity market has judged that short-term economic damage is tolerable if the conflict resolution timeline is not multi-year.

Disagreement on Risk Pricing and Inflation

• The equity market's optimism contrasts with the rates market, which continues to price in significant "hawkish" central bank responses due to anticipated inflation bulges.
• Wilson argues the market is likely "too hawkishly priced" regarding rate hikes; while some inflation is expected, the probability-weighted forecast across central banks remains biased toward lower rates than current market pricing suggests.
• U.S. and European central banks are expected to adopt a "wait-and-see" approach, likely keeping rates steady ("nothing happens") rather than executing the extended cuts previously anticipated or the aggressive hikes feared during peak tensions.
• A key divergence remains: markets have unwound fears regarding medium-term growth damage but retain concern over the inflationary impact of the crisis.

Currency and Geopolitical Flow Trends

• The U.S. dollar has seen a partial reversal of early-year weakness, supported by safe-haven flows and the U.S. profile as a net oil importer/exporter balancing act during the shock.
• Goldman Sachs maintains a medium-term bearish view on the dollar due to structural factors (high valuation, AI concentration risks, geopolitical shifts), but anticipates short-term support from the current energy crisis.
• Global capital flows out of the U.S. into other developed markets (specifically Europe and North Asia) have been negatively impacted by the conflict, as these regions are perceived as more exposed to energy supply disruptions.
• Investors are becoming more discerning regarding non-U.S. assets, with a heightened reluctance to reallocate capital abroad until oil market tightness is resolved.

Sector Performance and Dominant Themes

• The "AI theme" has returned as the primary market driver; semiconductor stocks have reached new highs, outperforming pre-conflict levels.
• Software stocks continue to face pressure due to competition concerns from new AI applications, even during the broader market recovery.
• Investors have largely refused to abandon core equity positions despite volatility, instead using market dips to re-enter preferred themes like tech, cyclical, and commodity-exposed assets.
• Private credit concerns remain a topic of discussion but have not resulted in new actionable insights or panic selling comparable to the initial crisis phase.

Investment Strategy and Forward-Looking Guidance

• Wilson advises a "selective long risk" strategy combined with aggressive hedging to protect against prominent downside tail risks.
• Investors should add protection (deep downside hedges) in equities and credit, as the market has reduced its pricing for these low-probability, high-impact scenarios.
• Market opportunities exist to add risk back into structurally favored areas (e.g., technology, Japan, Korea, commodities) during "miniature pullbacks" driven by negotiation uncertainties.
• The recommended approach is cyclical: relax hedges when markets rise and add hedges when markets fall, acknowledging that the distribution of possible outcomes remains unusually wide.