The Iran Factor: Oil and Uncertainty
The dominant force weighing on markets right now is the intersection of oil prices and the U.S.-Iran conflict. When these two pressures ease, markets are poised to fly — and we have already seen brief glimpses of that potential in recent trading sessions. The core problem is not economic weakness but geopolitical murkiness. Even well-connected insiders describe the Iran situation as highly uncertain, and markets despise uncertainty above almost anything else. That lack of clarity naturally pushes volatility higher and inflates risk premiums across the board.
The Magnificent Seven — the mega-cap technology stocks that have led the market for years — have not been immune. Some of these names have suffered drawdowns of as much as 22%. Yet beneath the surface turbulence, the structural story remains intact.
Three Key Indicators Still Favor Bulls
When assessing whether a geopolitical shock is likely to derail a broader economic expansion, three indicators matter most: corporate earnings, inflation, and interest rates.
Corporate earnings are expected to come in above last year's levels. This is not a market running on hope alone; profitability continues to grow. Inflation, meanwhile, has defied the worst fears. A year ago, consumer expectations pointed toward inflation running at roughly 6.7%. Actual inflation has come in well below that figure, which means the economy has avoided the stagflationary scenario many feared. Interest rates have shifted modestly: the expectation has moved from multiple rate cuts to at least one cut by year-end. That is less accommodative than hoped, but still supportive.
Taken together, these three pillars suggest the economy stands on solid footing despite the geopolitical noise.
Midterm Year Volatility Is Normal
Historical patterns offer additional reassurance. In midterm election years, a drawdown of roughly 15% is entirely normal. The current pullback represents only about half of that typical decline. This does not mean further downside is impossible, but it does mean that the correction so far is well within the bounds of what history would predict — and midterm-year selloffs have historically been followed by strong recoveries.
AI Adoption Remains in Its Infancy
One of the most compelling longer-term arguments for equity markets is the artificial intelligence revolution. Only about 19% of companies have effectively utilized AI so far. That means more than four out of five companies have yet to meaningfully integrate a technology that promises to reshape productivity and margins. The early innings of a technological transformation of this magnitude are historically bullish for equities, and we are still firmly in those early innings.
A Weakening Dollar Favors International Diversification
Another structural trend worth monitoring is the weakening U.S. dollar. When the dollar enters a sustained downtrend — and there is reason to believe this is a long-term shift — international equities tend to outperform their domestic counterparts. Investors overly concentrated in U.S. stocks may be leaving significant returns on the table by ignoring global opportunities.
Practical Strategy: Quality, Patience, and Rebalancing
In an environment defined by geopolitical uncertainty layered on top of sound economic fundamentals, the right approach is disciplined, not dramatic. Several principles stand out:
Focus on quality. This means quality stocks with strong balance sheets and quality bonds — preferably individual bonds, which currently offer yields above inflation. For context, bond yields spent the better part of two decades running below inflation, so the current environment represents a genuine advantage for income-oriented investors.
Avoid headline-driven trading. Making dramatic portfolio shifts based on daily news is a reliable way to destroy wealth. Risk management matters far more than reaction speed.
Look for companies with durable dividend growth. Businesses that have consistently increased their dividends over long periods — targeting roughly 7% annual dividend growth — tend to be the kind of well-managed, properly hedged companies that weather volatility well.
Lean into beaten-down quality names. Volatility creates opportunity. A company like Microsoft, which has been hit hard in the recent selloff, is not going anywhere. These are businesses most investors will hold for decades. The key is position sizing — owning perhaps 3% of a portfolio rather than the 6% weighting found in a broad index, maintaining diversification while still capturing the rebound.
The Headline Index Masks Deeper Opportunities
One of the most important and underappreciated dynamics in the current market is the gap between headline index performance and what is happening beneath the surface. At recent lows, the broad index was only about 4% off its all-time closing high — yet individual stocks and sectors have experienced far more dramatic repricings. This divergence means that selective, bottom-up investors have a richer opportunity set than the index level suggests.
The message is clear: the geopolitical storm will pass, the economic fundamentals remain sound, and the investors who maintain discipline through the turbulence will be best positioned when clarity returns and markets resume their upward trajectory.