A drawdown triggered by geopolitical conflict may provide an opportunity to add

Overview

This report is a global equity strategy note with the core view that the drawdown from lower risk appetite caused by geopolitical conflict is not over, but if the investment horizon exceeds the next few days or weeks, potential weakness should be treated as an opportunity to add over a 3/6/12-month horizon. It emphasizes that oil price shocks and conflict escalation increase volatility, but current inflation, wage, growth, central-bank starting points, and corporate pricing power differ materially from 2022, so stagflation is not viewed as the most likely outcome for H2 2026.

Core views

The report reiterates a constructive view on duration positioning and argues that if the conflict de-escalates, central banks may look through a one-off inflation shock; even if the conflict causes a slowdown, central banks are still unlikely to continue tightening aggressively. On equity allocations, the report favors non-US markets, emerging markets, the euro area, value, small-cap and cyclicals, and argues that international equities and EM, which have been relatively stronger year-to-date, could regain leadership after the conflict shock.

Analysis framework

The report combines historical equity returns around oil price spikes, technical oversold signals, investor sentiment, earnings revisions, valuation discounts, flows, macro leading indicators, inflation and wage trends, plus regional and sector allocation comparisons to form its strategy call.

Methodology notes

• Historical scenario comparisonReview of S&P 500 forward returns during a sharp oil price spike

  Stock market performance after Brent rises about 50%-60% in the short term

  Historical samples show that after Brent rises rapidly and the S&P 500 reaches around a 50% rise in oil, the index has on average risen about 1%, with 6- and 12-month forward returns of about +7% and +14%, and a 12-month positive return hit rate of about 73%.

• Technical indicatorsRSI oversold signal

  Euro Stoxx 50 RSI near 30

  The report treats RSI near 30 as a signal that risk assets are entering oversold and potential capitulation, and argues such signals usually help identify a medium-term buying window.

• Macro comparisonCurrent setup versus 2022 template

  Differences in inflation, wages, corporate pricing power, energy, and policy-rate starting points

  The report believes wage growth has cooled, services inflation is declining, firms' ability to pass on costs has weakened, and the Europe gas shock is weaker than in 2022, making the oil shock more likely a one-off disturbance rather than persistent stagflation.

• Regional and style positioningEarnings revision and valuation discount framework

  Upward earnings revisions, valuation discount, and light positioning jointly support non-US and EM

  Earnings upgrades in non-US and EM are at a relatively early stage and valuations are meaningfully discounted versus DM, while flows were relatively strong early in the year but paused after the conflict; the report expects flows to recover if conflict risk fades.

Asset mapping & comparison

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

• Global equities

  Core allocation asset

  Strengths

  Earnings expectations are still being revised up, historical 12-month stock returns after oil shocks are usually positive, and oversold technical signals support a medium-term rebound.

  Weaknesses

  Short-term performance is highly sensitive to geopolitical headlines, oil prices, and risk-on/risk-off flows.

  Comparison

  The report says the current environment is different from oil-shock periods with poor stock performance such as 1974, 2000, and 2022.

  Risks

  Conflict escalation, oil staying elevated for longer, central-bank policy mistakes, or a weakening in earnings revisions.

• Euro area equities

  Overweight region

  Strengths

  Valuation discount is clear, with policy catalysts and improving earnings support; index target implies roughly 6-7% upside.

  Weaknesses

  More dependent on energy imports and thus more sensitive to energy price and growth shocks during conflict.

  Comparison

  MSCI Europe forward P/E is around 14.0x, below U.S. at about 19.5x; recently MSCI Eurozone was down 4.0%, versus MSCI US down 0.8%.

  Risks

  Natural gas prices rising again, ECB over-tightening, and higher sensitivity of Europe to growth shocks.

• Emerging market equities

  Overweight region

  Strengths

  Valuation versus DM is near historical lows, earnings growth outlook is strong, and both early-year flows and China data are favorable.

  Weaknesses

  Flow activity paused during conflict; a stronger safe-haven dollar can weigh on performance.

  Comparison

  The report expects EM and non-US equities to regain relative support versus the U.S. if dollar safe-haven demand fades.

  Risks

  The dollar staying strong, trade routes being disrupted, and China exports being hurt by conflict escalation.

• Duration/rate-sensitive assets

  Reaffirmed allocation bias

  Strengths

  If conflict shocks growth, central banks are unlikely to continue rate hikes; if conflict eases, inflation uplift may be looked through, allowing duration positioning to re-emerge.

  Weaknesses

  Markets have raised ECB hike expectations and cut Fed-cut expectations, while short-term rate volatility remains elevated.

  Comparison

  The report believes the market's re-pricing of ECB and Fed policy may be excessive.

  Risks

  Oil staying elevated could de-anchor inflation expectations and force central banks to stay more hawkish.

• Value and small-cap styles

  Preferred styles

  Strengths

  Earnings dispersion, valuation discount, and broadening leadership support continued value and small-cap outperformance.

  Weaknesses

  If growth shocks intensify, small-cap and cyclical exposures could come under pressure.

  Comparison

  Consistent with the report's Year Ahead rotation from growth toward value, small-cap, and international markets.

  Risks

  Weakening global demand, tighter financing conditions, and persistently low risk appetite.

• Defense

  Relatively cautious

  Strengths

  Some individual names may still be attractive.

  Weaknesses

  The report says the sector, after being a top theme over the past two years, currently lacks earnings upgrades and direction has been unclear over the past six months.

  Comparison

  Compared with cyclical sectors such as semiconductors and industrials, enthusiasm for defense has cooled.

  Risks

  Crowded theme positioning, insufficient earnings upgrades, weakening valuation support.

• Mag-7 and AI losers

  Short-term downside or limited, but medium-term dispersion

  Strengths

  Mag-7 valuation premium has narrowed from 1.7x of the S&P 500 to 1.2x, and AI losers have also experienced substantial de-rating, so absolute downside may be limited.

  Weaknesses

  The report believes both groups may still lag in the medium term, with AI-exposed companies' earnings potentially pressured.

  Comparison

  The AI losers basket has outperformed the market by about 5% from recent lows, but the report stresses this is not a long-term view.

  Risks

  AI displacement continues to pressure earnings in software, business services, and media.

Key data

• Historical forward returns after oil shockS&P 500 about +7% over 6 months, about +14% over 12 months, with a 12-month positive return hit rate of about 73%Based on historical samples where Brent rose about 50%-60% in the short term.
• MSCI AC World drawdownabout 9% from pre-conflict peak to troughReflects global equity risk appetite shock after geopolitical conflict.
• Technical oversold backtestIn the past 10 years of signals, probability of stocks rising over the next 1 month is 82%, and median 3-month and average 6-month returns are +5% and +8%Used to support the call to add on weakness.
• S&P 500 2026 EPS growth outlook18.4%, up from 15.4% at the end of FebruaryThe report believes geopolitical shocks have not yet damaged earnings momentum.
• MSCI EMU 2026 EPS growth outlook18.2%Supports improving euro area earnings and a non-US bias.
• Emerging Markets 2026 EPS growth outlook38.9%The report sees EM earnings growth as strong.
• World ex US vs US year-to-date performanceWorld ex US was up 11% year-to-date before the conflict, US was 0%Some risk-premium repricing was unwound in the early safe-haven phase, but the report expects relative performance to strengthen again in the second half.
• China dataJan–Feb export growth was 15.9% versus December; manufacturing PMI returned to 50.4Cited as evidence of improving fundamentals in EM and China.
• Euro area relative valuationMSCI Europe forward P/E around 14.0x, U.S. around 19.5xThe valuation discount supports relative appeal in the euro area.
• Euro area target return potentialabout 6-7%Implied upside from the report's index target.

Impact & implications

If the report's thesis is correct, the recent pullback from geopolitical conflict, oil, and safe-haven positioning likely represents a medium-term add point rather than the start of a trend-following bear market. At portfolio level, allocations should avoid excessive de-risking during sentiment capitulation and gradually increase exposure to duration, the euro area, EM, value, small caps, cyclicals, and select semiconductor/industrial positions while reducing reliance on persistent defense themes and certain AI-sensitive sectors in the medium term.

Risks

• Geopolitical conflict escalates further, trade routes are disrupted, and global demand is suppressed.
• Oil remains elevated or even near the 125-150 USD per barrel range, leading to a more severe inflation shock.
• Central banks misread the one-off inflation shock and tighten too much, with ECB hikes particularly hurting regional growth.
• Investor positioning has not fully capitulated; final liquidation events could manifest as 2-3 day air-pocket style sell-offs.
• The dollar safe-haven bid lasts longer than expected, weighing on emerging markets and non-US equities.
• China exports may be hurt by Middle East conflict escalation and weakening global demand.
• If earnings dispersion stalls or EPS expectations are revised down, the cases for value, small-cap, euro area, and EM allocations would weaken.

What to watch

• Whether the Middle East conflict de-escalates or produces new escalation headlines.
• Whether Brent stays above 125 USD per barrel or approaches 150 USD per barrel and remains there for several months.
• Whether wage growth, services inflation, and inflation expectations re-accelerate or become de-anchored.
• Changes in ECB and Fed policy pricing, especially the ECB hiking path and Fed cutting expectations.
• Global and regional earnings revisions, particularly 2026 EPS expectations for the S&P 500, MSCI EMU, and EM.
• Whether the dollar loses its safe-haven bid and whether EM flows recover.
• Whether Euro Stoxx 50 RSI, global equity oversold signals, and risk de-risking are entering the final capitulation phase.
• Whether China exports, industrial production, fixed-asset investment, and PMI continue to improve.