Risk assets on the rise – despite the fallout from the Iran crisis

With the prospect of the Strait of Hormuz reopening, the environment for riskier asset classes has become even more favourable. This is because economic growth indicators and the AI boom point to a supportive growth environment. However, there are a number of factors to consider, such as the fallout from the Iran crisis and the increased risk of inflation.

Three forces are shaping the market environment

Overall, three forces are dominating developments in the financial markets, and these are, of course, not independent of one another.

1. Firstly, the growth indicators point to the ‘inflationary growth’ phase of the economic cycle. Here, inflation is above the central bank’s 2% target, and inflation-adjusted economic growth is at or above potential – on average across many countries.
2. Secondly, the AI boom is boosting investment, manufacturing, exports, profits and share prices – though naturally not in every country or every sector. In countries such as Taiwan, exports and GDP growth have risen sharply.
3. Thirdly, the de facto closure of the Strait of Hormuz is generating a stagflationary impulse – higher inflation and lower growth – with uncertain intensity and significant tail risks. The prospect of a reopening has improved predictability.

Growth remains solid – but not everywhere

A selection of the latest growth indicators paints a mixed but overall positive picture. However, when countries are aggregated at a global level, growth at potential is fortunately emerging – despite the rise in energy prices. The Purchasing Managers’ Indices (PMI) for May also send a similar message: growth remains strong, albeit with increasing divergence. Signs of weakness came primarily from Europe and the services sector at a global level. The PMI for the manufacturing sector points to strong global production growth of around 3% (annualised).

USA: Robust consumption, strong investment

In the USA, real consumption growth was rather weak at 0.1% month-on-month – but still strong at 2.1% year-on-year. It is noteworthy that consumption has risen even though real incomes have shrunk for the third consecutive month and are down by 1.1% year-on-year. Consumption growth was financed by a decline in the personal savings rate to a low level (April 2025: 5.5%, April 2026: 2.6%). On a positive note, the average US consumer is willing to “tighten the belt”. The estimate for consumption growth in the second quarter stands at 2.5%, annualised.

Another positive is that the leading indicators for business investment – orders and shipments of capital goods – were strong. The estimate for investment in the second quarter stands at over 10%, annualised. Furthermore, the breakdown of gross domestic product in the first quarter showed strong profit growth in the corporate sector at 12% year-on-year – across the entire sector, not just among listed companies.

In addition, there are growing signs of an improvement in the U.S. labor market, which had been sluggish until recently. After all, the three-month average of new jobs created rose to 188,000 in May. To keep the unemployment rate stable, employment growth of around 50,000 would currently be necessary. However, because fluctuations in employment growth have been unusually high in recent months, the assessment of underlying growth is uncertain. The latest labor market data, however, suggest that consumer spending—and thus economic growth—now appears (even) more sustainable.

Eurozone: Stabilisation at a low level

In the eurozone, economic confidence, as measured by the European Commission, rose slightly in May. The level is still well below that of February. GDP growth is estimated to have been virtually stagnant in the second quarter. However, there are at least signs of stabilisation following the decline. Although the Purchasing Managers’ Index (overall figure) fell further in May, it has been revised upwards compared with the flash estimate. Furthermore, the manufacturing PMI is above the February level.

China: Weakness with glimmers of hope

In China, the data points to a further slowdown in GDP growth in the second quarter. Domestic demand is particularly weak. On the positive side, the aggregate of the Purchasing Managers’ Indices in May signals an improvement. The slowdown may turn out to be less severe than expected.

Hormuz Strait opening takes pressure off the markets

Indeed, there are signs of progress in the negotiations between the US and Iran. This would mean that the stagflationary impulse triggered by rising energy prices would not intensify, but would fade away. In response, the oil price has fallen (Brent stands at $97 per barrel).

The knock-on effects remain noticeable

However, the aftermath of the closure of the Strait of Hormuz will continue to be felt for quarters to come: the oil price is likely to remain above February’s level. This is because it will take months for shipping traffic through the strait to return to normal. Furthermore, production facilities have been damaged. Bottlenecks in energy supply remain a possibility – at least in some countries. Inflation, too, will remain above its baseline level in the coming months. Not only because energy prices remain elevated, but also because spillover effects onto other inflation components are likely. The resulting decline in purchasing power dampens real income and thus economic growth – to varying degrees from country to country.

Inflation expectations come into focus

Last but not least, central banks will be more focused on combating inflation than they were in February. More specifically, the main priority is to tackle rising inflation expectations. This is because some indicators of long-term inflation expectations have risen. The University of Michigan’s measure has risen to 3.9%, and the ECB’s to 2.9%. The question is not whether these expectations are right or wrong. When it comes to inflation expectations, the issue is whether they could become reality via the self-fulfilling prophecy mechanism. If enough groups involved in the economic process expect higher inflation, then inflation will actually rise – expectations then create reality.

At present, higher inflation expectations among US consumers also reflect a prevailing mood. If inflation expectations do indeed rise sustainably, it will be too late. Then, a few tenths of a percentage point in key interest rate hikes will no longer be enough to counteract this. Several hundred basis points would then be required. That’s why numerous central banks are currently signaling their readiness to raise key interest rates.

For the European Central Bank, a key interest rate hike from 2% to 2.25% on 11 June is fully priced in. For the US Fed, the next interest rate hike is expected in March 2027. Although no rate hike is expected for the next meeting of the Fed’s Open Market Committee on 17 June, at least a shift away from the still officially existing inclination towards rate cuts is anticipated. Additionally, it is possible that under the new Fed chairmanship of Kevin Warsh, so-called forward guidance – that is, the central bank’s steering of market expectations – will be abandoned.

Why the Fed is acting too growth-friendly

Furthermore, a mispricing is evident. In fact, the market should be pricing in more interest rate hikes for the Fed than for the ECB. This is because the significantly higher US growth rate allows for a smoother pass-through of higher energy prices to other inflation components. In addition, the unemployment rate could fall—even though it is already low—because employment growth has picked up. Conclusion: The Fed’s monetary policy stance is likely too growth-friendly – and thus inflationary. Consequent statement: This stance creates a generally positive environment for equities.

Three tail risks for the markets

If the Strait of Hormuz remains closed for too long, there is a risk not only of another sharp jump in energy prices, but also of energy shortages and disruptions in the global supply chain. The result would be a recession.

If inflation remains at an elevated level for too long, there is a risk of a sustained rise in long-term inflation expectations among an increasing number of groups involved in economic activity. This could indeed lead to a permanent rise in inflation, accompanied by significant increases in key interest rates.

At the third level, the high profit and productivity expectations placed on AI could be disappointed. That’s what happened with Broadcom last week. In addition, the upcoming mega IPOs (SpaceX, Anthropic, OpenAI) and stock offerings (Alphabet, Meta) are draining liquidity from the market. Until then, however, the AI boom is supporting growth.

Conclusion: Risk assets with tailwinds – but not without risks

In summary, it is striking that all three forces have an inflationary effect – positive for “real assets” such as shares. Furthermore, aggregate growth indicators are positive, the AI boom is continuing, and tail risks surrounding Iran have diminished – all of which supports risk assets. However, the risks have not gone away. The Strait of Hormuz is still closed, the strong US jobs report is fueling expectations of a Fed rate hike, and the mega-IPOs require a lot of liquidity.

 

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