Investors bet on Iran talks restarting

Key Concepts

• Macro Tailwinds: Positive economic forces, specifically synchronized central bank rate cuts, driving market resilience.
• Supply Shock: A sudden disruption in the supply of a commodity (oil) that impacts global prices and economic stability.
• Forward Guidance: A communication tool used by central banks to influence the financial decisions of households and businesses by signaling future monetary policy.
• EPS (Earnings Per Share) Growth: A key indicator of corporate profitability, used here to assess market health across different geographies.
• Business Outlook Survey: A sentiment indicator measuring business confidence, investment intentions, and hiring plans.
• Cyclicals/Value/Materials: Asset classes that typically perform well during periods of economic expansion and recovery.

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1. Market Resilience and Macro Outlook

Sebastian McMahon, Senior Economist at IA Global Asset Management, attributes the current market resilience to strong "macro tailwinds"—specifically, synchronized interest rate cuts by central banks projected through 2025 and 2026. Despite the geopolitical supply shock involving the US and Iran, markets remain bullish.

• The Key Variable: The duration of the oil supply disruption is the primary risk. If a blockade persists through Q3, it could threaten the current investment thesis favoring commodities, cyclicals, and materials.
• Historical Context: McMahon notes that oil price shocks (e.g., Iraq, Afghanistan, Libya, Ukraine) are historically "blips." Stock market drawdowns during such events typically range from 5% to 15%, with markets usually recovering to all-time highs within three months, provided the broader macro backdrop remains stable.

2. Earnings Expectations and Geographic Analysis

McMahon analyzes earnings expectations to gauge global economic health:

• US Markets: Large, mid, and small-cap earnings expectations have been revised upward.
• Canada & Emerging Markets: Despite volatility, these regions show strong growth, with expected EPS growth of 20–25% over the next 12 months.
• Europe: Expectations were downgraded from 20–25% to 15% due to Europe’s status as a net energy importer, though signs of recovery are emerging.
• Supporting Evidence: The thesis of global resilience is further supported by rising ISM (Institute for Supply Management) and PMI (Purchasing Managers' Index) data, alongside accelerating exports from South Asia.

3. Central Bank Strategy and Monetary Policy

McMahon outlines the "playbook" for the Federal Reserve and the Bank of Canada (BoC) regarding upcoming policy decisions:

• Current Stance: Central banks are expected to remain on the sidelines.
• Forward Guidance: If inflation expectations become "de-anchored," central banks will likely use forward guidance to comfort markets rather than immediate rate hikes.
• The Trigger for Action: If the oil blockade fuels core inflation and broadens the impact to food and shipping costs, the BoC may be forced to hike rates in Q4. However, the base case remains that significant policy shifts are unlikely until Q1 2027.

4. Canadian Business Sentiment

The Bank of Canada’s Business Outlook Survey is highlighted as a critical indicator for domestic economic health:

• Sentiment Shift: After 12 quarters (three years) of net negative sentiment, business confidence has reached a "neutral" level.
• Investment Intentions: There is a measurable increase in intentions to invest in machinery, equipment, and hiring.
• Strategic Goal: McMahon emphasizes that projects like the newly announced pipeline are essential to fueling business confidence, fostering prosperity, and increasing Canada’s economic independence from the US.

5. Synthesis and Conclusion

The overarching takeaway is that the global economy is currently in a "resilient moment," capable of absorbing geopolitical supply shocks. While the duration of the oil conflict remains the primary risk to the bullish forecast, historical data suggests that such shocks are temporary. Investors are advised to maintain exposure to risk assets, as central bank support and improving business sentiment in Canada provide a solid foundation for continued growth. McMahon concludes that while the odds of central bank intervention by year-end are rising, the current strategy remains one of patience and optimism.