The Unwinding of a Key Correlation
A subtle but important shift is taking place in global markets. The negative correlation between energy prices and equities — a relationship that had been a reliable compass during periods of geopolitical tension — has noticeably waned. Even as energy prices rise, stocks are trading largely unchanged. The most plausible explanation is a form of fear of missing out, but directed at peace rather than at rallies. Traders appear to have been caught off guard by being too heavily hedged going into the first ceasefire, and now they are positioning as though diplomatic resolution is the path of least resistance.
There is some logic to this optimism. Both sides of the current conflict face real constraints on continuing hostilities. U.S. political realities ahead of the midterms limit appetite for prolonged escalation, while Iran's ability to survive economically without oil and gas revenue limits how long it can afford to remain cornered. These pressures keep a deal within view. But the weekend's events remind us that the unexpected can and does happen, and further flare-ups are entirely possible before any lasting settlement emerges. Markets, therefore, remain nervous and prone to volatility even as they tilt optimistic.
Why Energy Normalization Will Take Longer Than Prices Suggest
A critical blind spot for investors is the gap between futures prices and physical reality. The Strait of Hormuz has not yet reopened, and even once it does, energy prices will not snap back to baseline. In many segments of the market, normalization could take several months at a minimum. On the liquefied natural gas side, damage sustained in Qatar could mean several years before that piece of the supply chain fully recovers.
What matters here is the distinction between paper markets and physical markets. Energy futures are priced for future delivery, and they do not always capture the constraints on actual cargoes moving today. A new force majeure declaration from Kuwait covering crude oil and refined products underscores this point: physical deliveries are being interrupted in ways that futures curves barely register. The longer these delays persist, the higher physical energy prices will remain, regardless of what the forward strip implies.
Three Scenarios for the Months Ahead
A scenario-based framework is the most honest way to think about the next several quarters. The moderate case envisions a gradual normalization of energy supply and prices through the second quarter. The adverse case extends disruption into the second half of the year. Both of these remain the most likely paths. A third, severe case — no normalization this year and a potential global recession — has become less likely, but it is not zero. Meaningful differences on key issues, particularly Iran's nuclear program and control over the Strait, keep that tail scenario alive.
So far, the economic impact has been limited, registering mostly in headline inflation. But the longer prices stay elevated, the greater the probability of genuinely negative results spilling through to growth, corporate margins, and consumer demand.
Who Bears the Most Exposure
The regions most vulnerable to a prolonged energy shock are Europe and Asia, both of which are major importers of Middle East energy. Their equity markets could continue to struggle if physical supply remains constrained. Within those regions, airlines are especially exposed — Europe in particular is grappling with tight jet fuel supplies. Resilient sessions in Asian markets in recent days should not be mistaken for insulation; they reflect positioning more than underlying fundamentals.
The Earnings Puzzle
Here is where markets may be setting themselves up for disappointment. Despite the war, global earnings estimates have actually increased. That is surprising. Most of the upward revisions outside the energy sector reflect company-specific updates rather than a considered reassessment of the macro environment, and analysts have been reluctant to make broader changes ahead of earnings season.
The real test comes when companies report and management teams speak. Valuations have eased somewhat, but that easing is built on elevated earnings expectations. If management guidance forces analysts to revise estimates downward, stocks that look reasonably priced today could suddenly appear considerably more expensive. The next earnings cycle is therefore the key event to watch for a reality check on current positioning.
The Longer-Term Bright Spot: Power and Industrials
Amid the near-term uncertainty, one structural theme continues to strengthen: the insatiable demand for power driven by artificial intelligence. AI remains a durable trend both for markets and for corporate earnings, and it has performed strongly across South Korea, Japan, and China. The implications extend well beyond the obvious chipmakers and hyperscalers.
Industrials look particularly attractive in this environment. Investment in the electrical grid has accelerated sharply in recent years, driven not only by surging power demand but by the pressing need to upgrade aging physical infrastructure. These companies are not immune to an economic slowdown, but the multi-year capital expenditure cycle tied to electrification and grid modernization offers a compelling long-term investment opportunity that can coexist with — and even benefit from — the current uncertainty. For investors willing to look past the noise of ceasefire headlines and physical energy disruption, this is where durable compounding may be found.