Summary
- Despite elevated policy uncertainty and geopolitical risks, growth momentum appears to be improving across sectors and regions, underpinned by still solid consumer spending and increasing business investment, with a helping hand from governments.
- That solid demand is posing near-term upside risks to inflation that are being compounded by supply-side pressures related to the ongoing war in Iran and its impact on energy markets, and broader supply chain pressures tied to shortages of key technology hardware.
- To the extent that a sustained resolution to the situation the Middle East can be attained while technology investments start generating productivity gains, these price pressures would likely subside and ease the burden on central bank policymakers to act to keep inflation contained.
- Such an environment would be constructive for a sustained broadening of earnings momentum which in turn would support financial markets that have experienced valuation adjustments that provide for better forward-looking prospects.
- Of course, there remain ample reasons for investors to be cautious. The policy uncertainty and geopolitical risks are likely to persist — and as recent years have shown, new threats and concerns, prior hereto unthought of, are likely to emerge which could render these generally positive thoughts on the outlook moot and roil markets.
- As such, the potential for disruptions to economic momentum will likely keep markets vulnerable to bouts of volatility. The best educated guesses, given the available information at the moment, however, would suggest that the most likely scenario appears to be one in which risk assets continue to climb the wall of worry.
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