UBS: Markets may continue chasing gains in the short term, but an early-cycle rotation after the conflict is unlikely to restart

Overview

This is a UBS global strategy report that uses 15 core charts to discuss whether markets are ready to move beyond the impact of geopolitical conflict. The core conclusion is that U.S. earnings remain strong and the S&P 500 has made new highs, so markets may continue rising in the short term; however, oil supply shocks, inflation pressure, weakening consumers, and overly high earnings expectations make a return to the pre-conflict early-cycle rotation unlikely. The report also points out that earnings risks in Europe are more immediate, while earnings risks in the U.S. may emerge further out.

Core views

First, the market rebound is not broad-based: technology and communication services have almost single-handedly driven U.S. equity performance, and new highs on low trading volume mean chase-the-rally pressure could support the short-term move. Second, macro cycle indicators do not support overly strong earnings expectations: consensus 2026 S&P 500 earnings growth exceeds 18%, which does not match the mediocre economy reflected in indicators such as consumers, income, spending, capex intentions, and manufacturing and services activity. Third, the rise in oil prices looks more like a supply shock than a demand shock; historically, supply-driven oil shocks often bring 2 to 3 months of earnings upgrades first, followed by significant downgrades as the growth-inflation mix deteriorates. Fourth, Europe is bearing energy cost and margin pressure earlier; China H-shares and MSCI China are dragged down by internet earnings downgrades, while A-shares have performed better because of their lower internet weighting and higher industrial and new energy weighting. Fifth, there is still no sign of systematic de-dollarization; the rise in real rates mainly reflects fiscal and growth concerns, and if real yields decline in the future, gold and silver may enter the next leg of gains.

Analysis framework

The report adopts a cross-asset and cross-region comparative framework, combining indicators such as oil shocks, equity trading volume, sector contributions, valuation changes, earnings expectations, economic cycle indicators, inflation risk, European profit margins, dollar deviations from rate-spread models, real interest rates, and precious-metals positioning to assess whether post-conflict market structure supports continued rotation in risk assets.

Methodology notes

• Macro cycleEconomic cycle principal component indicator

  Build an economic cycle indicator using multiple macro variables and compare it with the trend in earnings revisions.

  The report mentions macro variables including the principal component of regional Fed capex intentions, consumer confidence expectations, the U.S. ISM manufacturing index, the U.S. ISM services index, real disposable income, real PCE, the small business optimism index, and the housing market index. This indicator shows a mediocre economy, yet earnings revisions are behaving as if in an early-cycle recovery.

• Oil price shockDistinguishing supply shocks from demand shocks

  Differentiate whether rising oil prices are caused by supply disruption or demand improvement.

  The report believes this round of oil price increases is closer to a supply shock. If analysts interpret the positive correlation between oil prices and earnings as a demand shock, they may underestimate the risk of subsequent earnings downgrades.

• Cross-asset valuationReal rates and precious metals framework

  Use changes in real yields to explain opportunities in fixed income, the U.S. dollar, and precious metals.

  The report notes that the rise in rates beyond the 5-year tenor has been driven almost entirely by real rates rather than inflation breakevens; if central banks become more concerned about growth, real yields could fall, which would benefit gold and silver.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500 / U.S. equities

  Supported in the short term by strong earnings and low-volume chase-the-rally behavior, but there is risk of earnings downgrades in the medium term.

  Strengths

  First-quarter earnings were strong, with technology, financials, materials, and utilities supporting earnings growth; new highs may force institutions to chase performance.

  Weaknesses

  Earnings growth expectations are above what the economic cycle implies about fundamentals, while consumers and some cyclical sectors remain weak.

  Comparison

  Compared with Europe and emerging markets, valuation pullback has been smaller; compared with small caps and value, the report prefers U.S. large-cap growth and quality.

  Risks

  Oil supply shocks, rising inflation, pressure on real income, and earnings downgrades.

• U.S. technology / communication services

  The core driver of this U.S. equity rebound.

  Strengths

  Technology and communication services have contributed an extremely large share of market gains, while hyperscale cloud capex and AI confidence make technology less tied to the cycle.

  Weaknesses

  Valuations in parts of technology have already risen, semiconductor valuations have pulled back slightly from highs, and there are still questions about software's long-term terminal value.

  Comparison

  Compared with cyclical broadening sectors such as consumer, industrials, and financials, technology remains the stronger main theme.

  Risks

  Lower AI capex expectations, software earnings downgrades, and valuation pressure.

• European equities

  Earnings and margin pressure are showing up earlier.

  Strengths

  The earlier Europe-outperformance trade had worked for a period.

  Weaknesses

  Crude oil and natural gas prices are rising together, new orders are falling, and input prices are increasing, so margin pressure has already emerged.

  Comparison

  Compared with the U.S., Europe is more sensitive to energy-cost shocks, and the consensus expectation of 10% earnings growth in 2026 faces downside risk.

  Risks

  Energy costs, margin compression, and earnings downgrades.

• Chinese equities

  Overall, they are not mainly affected by the oil shock, but rather by internet earnings downgrades and index structure.

  Strengths

  China's economic data remain fairly solid, and A-shares have performed better due to lower internet weighting and higher industrial and new energy weighting.

  Weaknesses

  H-shares and MSCI China have higher internet weightings and continue to be dragged down by earnings downgrades.

  Comparison

  Korea and Taiwan benefit more directly from the semiconductor sector, while China lacks a semiconductor hedge of comparable scale.

  Risks

  Further internet earnings downgrades and a repricing of terminal values in consumer-related sectors.

• Gold and silver

  A decline in real yields could support the next leg higher.

  Strengths

  Earlier signs of overheated positioning have eased, and lower real yields would improve the allocation backdrop for precious metals.

  Weaknesses

  The report turned cautious in January because of bubble signs, indicating that crowded-trade risk had previously been high in the short term.

  Comparison

  Compared with general commodities, precious metals are more directly affected by real rates and the U.S. dollar.

  Risks

  Further increases in real yields, a stronger U.S. dollar, and renewed crowding in precious-metals positioning.

• U.S. dollar

  No systematic de-dollarization discount is evident.

  Strengths

  The dollar's deviations from rate-spread models are relatively symmetric across currencies.

  Weaknesses

  The dollar is weaker than rate-spread-implied levels against some currencies such as EUR, CHF, AUD, and CNY.

  Comparison

  The dollar is stronger than rate-spread-implied levels against currencies such as JPY, KRW, SEK, and INR, so overall this does not constitute evidence of systematic de-dollarization.

  Risks

  Declining policy credibility, growth concerns, and changes in rate spreads.

Key data

• Current oil shock magnitudeOil prices rose close to 100% within 2 to 3 months, with a loss of about 9 to 10 million barrels per day, or roughly 10% of global supplyThe report says this scenario most closely resembles the first Gulf War in 1990, but the current disruption is larger.
• First Gulf War comparisonOil prices rose about 80% within 2 to 3 months, with a loss of about 4 to 5 million barrels per day, or roughly 6% to 7% of global supplyUsed to compare oil price paths under geopolitical supply shocks.
• Consensus 2026 S&P 500 earnings growth expectation18.3%The report believes this level does not match most cyclical indicators.
• Technology's contribution to U.S. equity gains since March 3068.5%Technology, including information technology and communication services, has been the main driver of this rebound.
• MSCI US valuation change12-month forward P/E down 0.3x since the conflict beganBy comparison, Stoxx 600 is down 0.5x and MSCI EM is down 1.1x.
• Consensus 2026 European earnings growth expectation10%The report sees downside risk in Europe, as rising natural gas and crude oil prices have already brought input-cost and margin pressure.
• Change in precious metals viewTurned cautious in January due to bubble signs, but current overheated positioning has easedIf real yields fall in the coming months, gold and silver may still have one final leg higher.

Impact & implications

For asset allocation, the report does not support simply returning to the pre-conflict risk-preference broadening trade. U.S. large caps, growth, quality, and technology may still hold a relative advantage, while small caps, value, non-U.S. equities, and cyclical broadening trades lack macro support. European equities face more direct energy-cost and margin pressure. Within Chinese assets, differentiation has emerged: H-shares and MSCI China are dragged down by internet earnings downgrades, while A-shares relatively benefit from a different weighting structure. In fixed income, rising real rates provide opportunities; in precious metals, easing positioning pressure combined with the possibility of lower real yields ahead may create new upside room.

Risks

• If the oil supply shock persists, it could push up energy costs and compress corporate profit margins.
• Rising inflation risk is building and could weaken the early-cycle recovery narrative.
• S&P 500 earnings expectations are clearly stronger than economic cycle indicators, creating risk of subsequent downgrades.
• European companies are bearing the impact of rising natural gas and crude oil prices earlier, and 2026 earnings growth expectations may be revised down.
• The market rebound has been on low trading volume and concentrated in technology, so limited breadth could amplify pullback risk.
• Multi-asset investing faces market risk, credit risk, interest-rate risk, foreign-exchange risk, correlation breakdown, geopolitical events, and policy shocks.

What to watch

• Whether the Strait of Hormuz fully reopens and whether global inventories bottom out by the end of April.
• Whether oil prices stabilize around the mid-USD 80s per barrel or surge again because of physical supply shortages.
• Whether the U.S. first-quarter earnings season can continue to beat expectations and whether forward earnings revisions begin to weaken.
• Whether oil-shock-sensitive sectors such as retail, autos, consumer services, apparel and durable goods, banks, and diversified financials see earnings downgrades.
• Whether Europe's new orders, input prices, and margin indicators continue to diverge.
• Whether central banks shift from focusing on inflation to being more concerned about growth, thereby triggering a decline in real yields.
• Whether gold and silver trading and positioning show renewed signs of bubble-like behavior.
• Whether the U.S. dollar shows a systematic discount relative to rate-spread models.