A solid backdrop

Operation Epic Fury, launched by the United States and Israel against the Iranian regime, has reshuffled the deck on the financial markets. Europe, perceived as more at risk from rising energy prices, has seen the outperformance of its equity market since the beginning of the year disappear. Although still in the lead, emerging markets have lost some of their lustre, particularly in Asia, the continent most dependent on transit through the Strait of Hormuz. Interest rates, which had been trending downwards on the back of positive surprises in the latest inflation figures on both sides of the Atlantic, have risen sharply. This reflects fears of a return to inflation linked to energy prices.  Conversely, the United States, which has been less popular in recent months, has withstood the stress, while the dollar has appreciated sharply. The consequences of the situation in Iran on the economy and markets remain highly uncertain for the time being, as they will depend on the duration and intensity of the conflict.

However, behind these sharp movements and increased geopolitical uncertainty, the economic environment is improving. On the US side, the latest survey data point to a clear improvement in business confidence. Many companies report that they have come to terms with the issue of customs tariffs. At the same time, earnings per share dynamics paint a picture of growth spreading beyond the technology sector alone. Employment remains a significant area of fragility, with the latest figures being weak and sometimes contradictory. However, there are signs of stabilisation in the most cyclical areas of employment, which could be a prelude to a reacceleration. This would boost consumption among households that are most dependent on earned income, thereby mitigating the phenomenon of “K-shaped” growth. While massive spending on AI is likely to continue, changing investors’ perception of large technology stocks – which are less cash-rich and less generous to shareholders – this environment would favour a continuation of the rotation that has been underway since the beginning of the year. This could have a positive impact on segments that have been less popular in recent years, particularly small and mid-cap quality stocks.

In Europe, the situation is different but no less positive. Business sentiment, although still moderate, is also buoyant. Investments resulting from German spending plans are materialising, the employment outlook is stabilising and even picking up slightly, while industrial production and construction are recovering. Even consumer sentiment appears to be improving: the savings rate has started to fall again, including in France, while retail sales volumes continue to rise. As in the US markets, this environment is conducive to a catch-up by small and mid-caps and favours a pro-cyclical positioning.

Of course, a major escalation and a deadlock in the conflict in Iran could undermine this outlook. However, it is important to note that these events are taking place in a global economic context that is capable of withstanding shocks. This is particularly true with regard to inflation. It should be remembered that the surge in prices due to the Russia-Ukraine conflict occurred in a context of already high inflation – 7.5% in the United States and 6% in Europe – a tight labour market and very strong wage inflation as a result of Covid-related disruptions. The current situation is very different, with inflation normalised and still slowing slightly, combined with a much more flexible labour market. In this respect, too, the global economy is capable of resilience. For investors, this is a crucial point to bear in mind in order to avoid any exaggerated reactions.

Enguerrand Artaz, Strategist, La Financière de l’Échiquier (LFDE)

Written on 06.03.2026 |

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