What to watch in the week ahead

• This week could prove a pivotal one in the Middle East conflict, with clear risks for investors. US President Donald Trump intensified threats to Iran on Monday, saying the Islamic Republic could be "taken out" quickly and renewing his demand for Tehran to allow the flow of shipping through the Strait of Hormuz. Investors will be on the alert for any signs of whether hostilities are set to intensify or a path to deescalation can be found.
• The central bank response to the war in the Middle East remains another focus for investors. So far, top officials have indicated that there is no rush to respond to higher energy prices. This week, investors will be seeking further guidance on the impact of the war from US consumer price inflation data for March, and on the Fed's approach from the minutes of its most recent policy meeting.
• Equities and fixed income fell in tandem in the first quarter, which drew to a close last week. How should investors position for the second quarter and beyond?

Will a clearer path to ending the Middle East conflict emerge?

Investors continue to process conflicting signals over the likely duration of hostilities in the Middle East, leading to further market volatility. Hopes of an imminent end to US-Israeli strikes were kindled when President Trump indicated he would be willing to call off attacks on Iran even if there is no deal to open the Strait of Hormuz. And Iran’s president said his nation has “the necessary will to end this war.” This combination led to a 2.9% rise in the S&P 500 on 31 March, the largest rebound since May 2025.

Such optimism faded quickly, after a televised address in which President Trump renewed his threat to attack Iran’s power plants if Tehran refused to make concessions, with warnings from the White House escalating over the weekend and into Monday. Meanwhile, Iran’s ability to strike back was underlined by the downing of two US jets, as well as drone strikes on two of Kuwait’s power and desalination plants along with the headquarters of Kuwait’s national oil company.

Market sentiment this week looks set to remain dominated by events in the Middle East. Recent swings have highlighted the dilemma investors face in navigating the conflict. Last week’s bounce served as a reminder of the potential opportunity cost of derisking portfolios abruptly. Any end to hostilities could lead to a sudden rebound. Equally, the longer the conflict lasts, the greater the strain on energy markets will become, with increasingly negative effects on economies and markets.

How the Iran war will develop in the immediate term remains highly uncertain, but we expect a path to de-escalation to emerge. So, we recommend investors stay invested and continue to view equities as Attractive against a backdrop of solid earnings growth and likely Fed policy easing later this year. Nevertheless, we favor a gradual derisking as the conflict continues. With energy prices likely to stay higher for longer, we have become more cautious on equity markets that are cyclical and most reliant on imported fuel. These include the European, Eurozone, and Indian equity markets, which we downgraded to Neutral in March. We have also scaled back our year-end target for the S&P 500 from 7,700 to 7,500, compared to 6,611 at the time of writing.

Will US data and Fed minutes shift views on the outlook for monetary policy?

There was mixed news last week on the outlook for Fed policy, as investors seek to assess the timing and direction of the central bank’s next move. On the one hand, Fed Chair Jerome Powell last week downplayed the need for tighter policy in response to higher energy prices, saying that the central bank was "in a good place" to wait and assess the economic effects of the Middle East conflict. This caused markets to back away from pricing the potential for a Fed rate increase in December.

On the other hand, stronger-than-expected US jobs data for March reinforced the view that the Fed does not need to rush to cut rates to protect employment. The unemployment rate fell to 4.3% from 4.4%. Job growth rebounded more than expected from a 133,000 decline in February, which was impacted by severe winter weather and a health care workers' strike. Employment for March rose 178,000, higher than all estimates in the Bloomberg survey. The three-month average of job creation, which irons out some of the distortions, was 68,000, the strongest run in almost a year.

The bottom line is that the latest developments have reinforced our view that rate hikes to combat the impact of the war in Iran are not on the horizon. Equally, while there seems no need for an urgent rate reduction, we still expect a return to easing later in the year, as further evidence emerges that the impact of higher US tariffs is fading and that the war with Iran has not led to a renewed surge in core prices. Our base case is for rate cuts at both the September and December meetings. With returns on cash likely to decline further, we recommend investors seek diversified income. This includes quality bonds, where investors have the opportunity to lock in higher yields owing to concerns over the threat of central bank rate hikes.

That said, this view will be tested in the coming week by upcoming data and further guidance from the Fed policy. The minutes of the Fed’s meeting on 17-18 March will be released. Investors will be hoping for further indications that hikes are off the agenda for now. The US consumer price index for March is also due, with economists expecting a 0.9% month-onmonth increase in headline figures. That would be three times faster than in February, reflecting higher energy prices and other supply bottlenecks. However, the Fed is more sensitive to core inflation, and investors would likely be reassured by signs of slowing price rises excluding energy and food. The Michigan consumer sentiment index for April will also be released. The focus here could be long-run inflation expectations, which have recently inched down. Investors could be reassured by signs this trend is continuing.

What comes next after a challenging month and quarter for portfolios?

Equities and fixed income fell in tandem in the first quarter, as higher energy prices arising from the Middle East conflict generated fears of both accelerating inflation and slower growth. The MSCI All Country World Index in US dollars lost 6.2% (on a total return basis) in March and 2.5% for the quarter. The S&P 500 fell 5% in March, despite a rebound on the last trading day of the month on hopes that the US and Iran might be willing to accept a compromise to end hostilities. The quarterly decline of 4.3% was the largest for the index since the third quarter of 2022.

Sovereign bond yields rose on expectations of tighter central bank policy, with the 10-year US Treasury yield climbing 15 basis points over the quarter to 4.32%—including a 38bps increase in March, the largest monthly jump since December 2024. There was also no respite last month in gold, which lost 11.2% on the month, with worries over tighter Federal Reserve policy and investor demand for liquidity creating headwinds. Brent crude was the big gainer, with the spot price up 94%, the biggest jump since the third quarter of 1990 when the Gulf War began. Meanwhile, futures contracts pointed to a protracted period of elevated prices.

So, what next? The price of Brent crude looks set to remain volatile, with the potential to rise further. We are moderately overweight energy in our Active Commodity Strategy. The price of gold is likely to rebound in the coming months, in our view. Part of the headwind has come from fears of tighter central bank policy, which would raise the opportunity cost of holding the zero-yielding metal. We view such fears are overdone, however. We expect gold to recover to USD 5,200 an ounce by June and to USD 5,900 by the end of the year. So, we still see the value of holding gold both as a form of diversification and a hedge.

Finally, the first quarter was notable for the high correlation between stocks and bonds. That provides a reminder of the importance of diversifying beyond these asset classes, including alternatives such as private markets and hedge funds.