Too Soon to Look Past This War?

How do investors assess the risks and opportunities presented by this war?  Markets already faced plenty of uncertainty: complexity around tariffs, AI disruption (is it a bubble? a job destruction device? Both? Neither?), stubbornly high interest rates, continued inflation, the White House’s antagonism toward the Fed.  That was quite a list, and yet markets appeared to find their way through and continued to rise.  Then came war. 

Some assumed it would last but a moment.  Others believed it would be the final catalyst driving markets over the edge and into the abyss.  Markets have clearly not been happy.  But they haven’t shown panic. At least not yet. 

What is happening? 
To me, markets look like they are working hard to figure out what is actually happening and where this all might lead.  And when we say markets, we mean millions of investors large and small, institutional and individual, sophisticated and naive.  Assets are being bought, sold, or held as investors reposition for how they see the potential future.  In all, markets are weighing out the tradeoffs between potential risk and opportunity.  Collectively, they represent the collective wisdom or folly embedded in these millions of decisions. 

Markets Process Risks
The many risks seem mostly well-known: higher oil prices, increased global inflation, recession risk, and the risk of the war continuing to spread.  All of these risks and fears have to be taken into sober serious consideration by investors.  But they also should be considered in terms of probability, magnitude, and duration: how likely are they to occur?  How big an impact are we talking about?  How long might this go on? 

We watched markets process another set of risks just one year ago as investors confronted the White House’s tariff policy announcement on Liberation Day.  It turned out that the impact was assessed as relatively low and the duration of the crisis was limited.  Investors who overreacted with fear likely saw their portfolios underperform.

Market Reactions So Far
As of this writing, markets haven’t reacted as negatively as the most fearful bears expected.  While the war has certainly been unwelcome news for investors, so far the reaction more resembles investment rotation rather than the start of something worse.  Rotation is where investors move from ostensibly high-valuation riskier investments into those that could be better bargains and thus perhaps better investments.  This is as opposed to a wholesale dumping of all assets in the face of a crash. 

A rotation among investments has been going on for several months and it seems to be continuing.  For example, during 2025 we saw a shift in allocation from US tech stocks to other equities both domestic and foreign.  This is often seen as the functioning of a healthy market.

Looking Past Risks
Markets are inherently forward-looking.  As they rapidly price in new developments, they try to look past the war and into the second half of the year and beyond.  With the current menu of risks well-established, what are sources for potential investor optimism?

Domestic Politics.  Politically the White House has substantial incentive to end this war, declare victory, and begin to rally voters in preparation for midterm elections.  How important do we think politics and market performance are to this administration?

Interest Rates.  The recently nominated Fed Chair Warsh is apparently the one the financial establishment wanted.  He may bring reform to the Fed (many think this is appropriate) and work hard to lower interest rates across the yield curve.  His actions could be quite positive for markets.

Fiscal Stimulus.  The President’s BBB legislation contained economic stimulus that is now working its way into the economy.  Historically, the incumbent does whatever it can to encourage a thriving economy going into midterms.

Rolling Selloffs.  Fears of a bubble in stocks may have less credence after the large selloffs that have already occurred across various sectors, importantly in AI and technology.  These selloffs have rolled through different sectors and offer a reset in prices and better entry points for investors.  Some sectors have already had their bear market and may be set to recover.

AI Impact Reconsidered.  We may find that the much-feared potential for AI to have destructive impact on the labor force was overwrought.  While it is becoming clear what areas of work may be replaceable by AI, we are only beginning to understand the real limitations of this technology as it is adopted and rolled out.

Muted Impact of Oil Prices.  Though oil prices have risen, in real (inflation adjusted) terms they are nowhere near the heights of prior oil shocks and as yet haven’t shown up significantly in inflation measurements.  Of course this could change.  But it is also important to note that the sensitivity of the US economy to oil prices is much less than during prior oil shocks.  The metric “oil intensity” for the US which measures the amount of oil consumed per unit of GDP (essentially the importance of oil to the US economy) has been trending down for decades.  

Considering Risks and Returns 
Most people seem well-versed in how bad this war could get.  This could last longer and spread wider than anyone expected.  We could end up with a world that is more dangerous and violent than before.  And markets could fall to meet these expectations.  It is also possible that there will be positive outcomes for investors: markets hold, ultimately judging that this will pass and the historical risks posed by Iran will be reduced.  No one of course knows which viewpoint will ultimately prove correct.  If you ask me to make a guess, I’d say that we probably get a bit of both: that the war and its awful effects continue longer and deeper than we’d want; and at the same time positive factors such as those listed above do in fact matter and have impact.  We see the underpinnings of US markets are still intact and this will ultimately be a setback, but not a change in long-term structural trends.  We think markets will find their way past this crisis battered, but better.  Hang in there.

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.  The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services (Source: U.S. Department of Labor).

The PCE price index, or Personal Consumption Expenditures price index, is a measure of the prices of goods and services purchased by people in the United States.