26 May 2026
Despite the conflict, there are reasons for investors to be constructive in the months ahead.
Key takeaways
It isn’t just Warren Buffett who has said it repeatedly: real investors keep their heads through periods of volatility because they provide opportunities to buy businesses with good fundamentals at better prices. And both equity and debt markets may be emerging from the fog of the US-Iran conflict in a more attractive place in terms of valuation and risk-reward.
That’s the conclusion of this month’s Fidelity Answers podcast featuring two people who need to know: Fidelity Chief Investment Officer for Equities Niamh Brodie-Machura and her counterpart for Fixed Income Marion Le Morhedec.
It is not a view that comes without caveats. Real risks for the global economy have emerged and need close monitoring in the weeks and months ahead.
“The longer the conflict goes on, the greater the risk of serious second- and third-order effects starting to kick in,” says Brodie-Machura. “And, frankly, the longer the physical disruption in energy supply persists, the harder it becomes to restore.
“When the conflict started, there was an assumption that if this is short, we should look through the volatility and focus on earnings. There was also a lot of commentary correctly pointing out that energy is a much less significant commodity economically and for consumers than it was in the 1970s, and also a much smaller part of the overall stock market.
“Now, that's correct. But concluding that it can therefore be ignored entirely is risky. Duration matters and we need to monitor those second- and third-order effects closely, as they pose downside risk to the outlook.”
That said, Brodie-Machura also highlights another important market driver in 2026 – the earnings upgrades seen globally in sectors like semiconductors.
“What we're seeing through 2026, even with all the news flow and shocking headlines, is that earnings are continuing to climb - and at an accelerating rate,” she says. “We're now looking at about 18 per cent forward earnings growth. That means, perhaps surprisingly given recent market highs, that valuations have actually fallen. Many international markets are now trading in line with historical averages, but with stronger earnings growth. That backdrop is supportive.”
The extra space on valuations has an origin in reality, however, and the risks to the economy are writ large across the change in the level of long-term bond yields over the past month. Much of that stems from worries about the oil-driven rise in inflation and how policymakers will respond in the quarters ahead. Expectations on the policy front, at least, have calmed.
“We had one week, in the middle of March, where market expectations went from central banks cutting rates to central banks hiking rates. I've been in fixed income markets for more than 25 years, and I have never experienced that as quickly,” says Le Morhedec.
“At the moment the market is pricing a much more rational central bank outlook.”
Higher defence spending, and signs governments will look to invest in new energy infrastructure in response to the oil shock, are also likely to weigh on public sector deficits, she says.
“For the long end of the government bond curve, this is clearly a more negative technical backdrop.”
Interest rates have repriced on the upside, making fixed income even more attractive with higher all-in yields.
“As long as we do not see a deterioration of the macro outlook significantly in the next few months, I think this will really give renewed confidence for investors into fixed income and in particular into credit markets.”
One place where volatility has caused particular consternation is private credit. Le Morhedec casts this as part of the cycle, and not one that is liable to spread to more liquid markets.
“Private credit was never meant to be liquid, never meant to be mark-to-market,” she says. “But actually, they've been packaged over the past few years in evergreen strategies, semi-liquid strategies as well, which was kind of interfering in a way with public credit, because public credit was the asset class providing that extra liquidity that private credit does not provide.
“I think this is very much a US asset story. There is a lot less leverage in Europe. And better quality of covenants. This is not going to stop tomorrow. And clearly, some investors are marking down their exposures and cannot redeem what they would like to redeem. But in my opinion, contagion to the point of fixed income is very limited.”
For Brodie-Machura, a key conclusion from recent weeks is that Europe must address what was already a pressing issue: high power prices. This will require both public and private investment.
“We know from the 1970s that major change was spurred by the oil crisis,” she says. “It accelerated the wind industry in Denmark, nuclear in France, and energy-efficient manufacturing in Japan.
“Self-sufficiency, whether through domestically generated energy, more localised defence spending, or more resilient supply chains, is a positive backdrop for equities and can support a broadening out of equity markets.”