The war continues, but other factors are influencing the markets
Given the difficulties in reaching an agreement to end the conflict in Iran, both inflation and growth forecasts show a wide range between the most positive and the most adverse scenarios.
Beyond the very short term, the performance of markets, stock exchanges, and bonds in 2026 depends largely on the aforementioned factors, which, as events demonstrate, are currently an unknown . Fortunately, there are other factors influencing the course of economies and markets, which I will briefly outline below.
Business results
The first-quarter earnings season has begun strongly , particularly in the United States and emerging markets. Major banks kicked off the season last week with solid results, reporting profit growth of around 15%.
In both the United States and emerging markets, technology companies are driving profit growth , while in Europe the strongest growth is seen in the energy sector . In the US, the consensus expects first-quarter profits to grow 13% year-on-year, while in Europe growth is projected to remain around 3%. In emerging markets, profit growth by 2026 is expected to exceed 40%, largely due to three semiconductor companies: SK Hynix, Samsung Electronics, and TSMC.
Technology continues to drive the stock markets, and this week we’ll see the release of earnings reports from five of the «Magnificent Seven»: Amazon, Alphabet, Microsoft, Meta Platforms, and Apple . Positive results are expected, supported by the sharp increase in AI investment, which should begin to translate into visible returns . In this context, strong results could reinforce the technology sector’s leadership and sustain risk appetite.
In summary, earnings revisions are clearly trending upwards in Asia and the US, and to a much lesser extent in Europe, with the exception of the energy and banking sectors. This partly explains the behavior of different stock markets, since, remember, company share prices tend to reflect their earnings . If earnings rise, the stock market value of companies usually rises as well, at least in the short term.
The appointment of the new chairman of the Federal Reserve (Fed)
Financial markets will be watching closely in the coming months to see if the next Fed chairman, presumably Kevin Warsh who is expected to be confirmed before the end of April, will be able to implement monetary policy without yielding to political pressure , a quality that is the basis of any central bank’s ability to combat inflation and underpins the financial stability of the US economy.
Candidate Warsh appeared a few days ago before the US Senate Banking Committee and announced the direction his term will take, and it seems there will be changes in US monetary policy, a fundamental factor for the behavior of global financial assets.
Among the changes that Warsh foresees, I find the following particularly noteworthy: promoting less dependence on the Fed’s balance sheet as a monetary policy tool and a gradual and orderly reduction of it, fewer meetings of the agency and a more discreet communication policy with less influence on the movement of the interest rate curve and, what I consider most relevant, creating a new inflation framework by reinterpreting the current 2% target with the possibility of introducing a comfort range of 1.5–2.5%, also using new techniques for measuring this indicator.
The consequences of all this for the markets would be very significant, especially for the price of gold and for fixed income , not only US bonds, but also those issued in emerging markets.
Finally, I find the comment made by the incoming Fed chairman regarding the potential deflationary effects of Artificial Intelligence (AI) quite striking. Are we witnessing the beginning of a paradigm shift in price levels in both developed and emerging countries? We shall see.
China is becoming what it once was
Just over a decade ago, the growth of the Asian giant was crucial to the evolution of the global economy, both because of its exports (deflationary for the West) and because of the public debt it accumulated from OECD countries, thus financing them. The crisis in its real estate sector and the lack of growth in domestic consumption led to a stagnation in its growth, which it now appears to be overcoming.
But, as a recent analysis by the British financial group Man reminded us , «the adverse factors that have hampered China’s trajectory are stabilizing, its technological leadership is accelerating and innovation is expanding.»
China is no longer just catching up with the US in AI; innovation is also expanding into the biotechnology sector . On the other hand, the real estate sector (the source of its GDP decline in recent years) is stabilizing, and the global desire to reduce dependence on fossil fuels from the Middle East will further boost demand for renewables, a sector in which China leads world production (92% of the world’s solar modules and 82% of its wind turbines are manufactured in Chinese factories).
Anyway, did anyone doubt that sooner or later this was going to happen?