The S&P 500 keeps printing record close after record close. Earnings are holding up, AI sectors continue to drive momentum, and on the surface the market looks resilient. But markets right now are no longer reacting to events themselves, they are reacting to what those events could become. And that distinction is exactly where the risk sits.
A real deal, a recovery in shipping flows, or cooperation between major players could ease the pressure quickly. If those don't materialise, the same risks are right back on the table. That makes price action reactive, uneven and hard to trust. The market is moving on hope, not on confirmation.
Equities ignoring everything
Equities are behaving as if the current environment is manageable. Earnings growth is strong and that gives the market enough confidence to keep climbing. But other markets are not sending the same signal.
Oil remains volatile. Bonds are tightening financial conditions. Geopolitical tensions are unresolved. These are typically not the ingredients for a smooth rally.
The result is a market that looks strong at the index level but is becoming increasingly selective underneath. Leadership is narrowing. Not every sector is participating equally. A setup like this can hold for a while, but only as long as conditions don't deteriorate further.
The real problem is that risk assets are now functioning as a source of hope, while economic conditions are actually under pressure. If those conditions deteriorate further, the opposite can be forced through unaffordability. And the consequences of that would be enormous.
The world is one headline away
The past few days have seen plenty of potential escalation. For now the ceasefire is holding and that matters. But the Strait of Hormuz remains heavily restricted. Only escorted convoys are getting through.
And new problems keep stacking up. The Panama Canal has become a point of contention between China and the US. Roughly 6% of global trade passes through it each year. When multiple problems concentrate around the same chokepoints, there is reason for concern. Oil is not yet trading as if the risk has disappeared, and with escalation rising, higher prices could persist longer than expected.
China has now stepped into the story too, and with good reason. It has enough reserves to bridge a period, but knows this is not a permanent fix. It has to act. And for Trump, the fact that he equally needs to nurture the relationship with China is actually good news. The upcoming visit could be the catalyst for a breakthrough.
At the same time, China adds a complicating layer. For the first time, it has legally permitted domestic companies to ignore American sanctions. That could complicate negotiations, or serve as a bargaining chip at the table. Trump says a deal with Iran is close and that the terms suit him. In typical Trump fashion, he is also threatening to strike hard if Iran doesn't agree. That would be devastating for both markets and economies.
The coming days will determine whether real progress is being made.
The quiet problem in the bond market
While all the attention is on geopolitics, bond markets are tightening financial conditions in the background. US yields have risen since the conflict began. UK long-term yields have reached levels not seen in decades.
This is no coincidence. It reflects a shift in how markets are pricing inflation and future policy. Higher yields mean tighter financial conditions. Borrowing becomes more expensive, valuations grow more sensitive, and the system as a whole has less flexibility.
If this coincides with an energy shock, a negative spiral develops. Oil disruptions feed inflation concerns. Inflation concerns push yields higher. Higher yields then feed back into risk assets.
What makes it more complicated is that the dollar is strengthening at the same time. Despite all the talk of de-dollarisation, the global system still leans heavily on dollar liquidity in times of stress. Rising yields, strong dollar demand, persistent geopolitical risk. Not a stable mix over the long term.
In the short term, it is even a positive signal. It shows that significant demand is waiting on the sidelines once we get past this hurdle.
Where this leaves markets
Markets are not short on information right now. They are struggling because too many outcomes are possible at once.
Relief is close enough to position for, but not close enough to trust. Pressure is visible but not strong enough yet to break anything. That keeps everything in a state of tension rather than resolution.
Meanwhile, bond markets continue to tighten conditions in the background, even as equities keep rising. That separation is manageable for now, but harder to sustain if it widens further.
Markets are reacting quickly but committing slowly. And until something shifts that balance in a clear direction, the behaviour won't change. Navigate the markets with caution. Don't force anything for the sake of forcing it, certainly not in conditions like these.
