Reasonably measured: Market reaction to the war

Sadly it is now apparent that is exactly the end game the American politicians had hoped would unfold. This expectation was clearly flawed bearing in mind the military might of the current regime and their lack of hesitation in using it against their own people. The willingness of Iran to attack its own close neighbours and potential allies has come as something of a surprise but their decision to close the Straits of Hormuz disrupting global oil supplies should have been anticipated. It is an extremely fast moving scenario and as I write we now seem to be moving towards attempts at a negotiated “peace” but this is, in no way, certain.

There has not been a meltdown in market values

Market reaction to the war has been reasonably measured, however the oil price has swung violently and continues to be extremely volatile in the short term. Other markets are close to the position they were in at the end of 2025 as gains made in January and February this year have been reversed, there has not however, been a meltdown in market values. Currently markets do not expect the military action to continue for months or years particularly with the lack of appetite for “boots on the ground” from the American people. Although President Trump is less than happy with America’s NATO allies as they have chosen to take only a minor role in the conflict, their decision to remain on the periphery has saved investors from even more volatility.

World economy should return to “normal”

The general expectation is that the conflict will end in the foreseeable future; with the opening of the Straits of Hormuz and the return of tanker movements through it, the oil price will fall back. At this point the world economy should return to “normal” but we will feel the effects of the current situation for months and possibly years to come. We had been anticipating that through 2026 inflation would continue on its (albeit stubborn) way down and that interest rates would follow suit. In the short term this is now very unlikely. We are very likely to see an uptick in inflation which could well mean that Central Banks, rather than cutting interest rates, look to increase them. The use of interest rates as a measure of control over inflation has always been something of a blunt weapon and in this instance it is clearly so. Any uptick in inflation will not be the result of excessive consumer expenditure rather it will be due to the increase in the price of essential items i.e. fuel and food. Punishing the consumer and businesses by raising interest rates seems somewhat unfair but frankly it is the only major weapon in the Central Banks’ arsenal.

AI continues but with discerning judgement

The development of AI continues with investors moving from a position of broad enthusiasm to one of discerning judgement. The wild noise about a “gold rush” is dying down and the more fundamental principles of commercial success and potential profits are coming to the fore. Where there are winners there are always losers and there has been a sell off (known as a Scare Trade) in companies that are perceived to be vulnerable to AI. Less thought has gone into which companies may be at risk, rather there has been a general increase in concern over companies operating in software, cyber security, logistics and even education and property. Last quarter I outlined the view that AI is seen as a disrupter and this feeling continues. However make no mistake, AI is already playing an ever increasing role in our lives from suggesting that junior lawyers are no longer needed (don’t ask what happens when the older ones retire!) to identifying areas to visit on an Italian holiday. In the same way that it is now commonplace to “Google it”, we will rapidly become used to using AI tools in an effort to make our lives easier.

This article is the opinion of David Wheildon