Global equities have rebounded to near-record levels, supported by optimism over strong Q1 earnings and improved risk sentiment linked to a US–Iran ceasefire. The rebound has helped markets recover most losses tied to the war.
S&P 500 estimates have improved, with market talk of 19% earnings and 16% margins in the US. Equity inflows rose during the week, driven by stronger earnings expectations and hopes of progress towards a peace deal.
Equities have shown unusually high correlation with the US Dollar, oil and bonds during earnings season. This lack of separation between asset moves has made equity allocation harder.
Estimated fiscal costs are 0.6% of GDP in the EU and 1–2% of GDP in Asia. Bond markets have not fully priced in new fiscal spending or inflation effects from a supply shock, and policy expectations have moved from easing towards tightening.
Among developed market central banks, markets still see the Fed as the only one likely to ease, with a 40% chance of one cut by year end. This has weakened the risk-free rate reference used in valuing equities across the US, Europe and Asia.
At the start of 2026, the rise in equity holdings was strongest in emerging market shares. A 15% drawdown from peak holdings leaves emerging markets open to further reallocations, especially if inflation and policy conditions limit earnings growth in Asia.
Global equities are pushing near-record levels, but the high correlation between stocks, the US Dollar, and oil creates a fragile setup. The CBOE Volatility Index (VIX) has fallen to 14.5 on ceasefire optimism, making it an opportune time to consider hedging strategies against a broad market downturn. This situation is unlike what we saw in mid-2025 when asset classes showed more independent movement.
Bond markets seem to be underpricing the risk from new fiscal spending and persistent supply-side inflation, as evidenced by the latest March 2026 CPI reading of 3.7%. This challenges the stability of the risk-free rate we use to value stocks. With markets only pricing a 40% chance of a Fed rate cut by year-end, uncertainty around policy is set to increase.
This policy confusion suggests preparing for sharp moves in either direction rather than betting on a single outcome. Strategies like long straddles or strangles on major indices like the SPX could be effective, especially ahead of the next Federal Reserve meeting. Such positions would profit from a significant price swing, regardless of whether it’s triggered by hawkish inflation data or a dovish policy surprise.
We see particular vulnerability in emerging markets, which rallied hard to start 2026 and still appear overextended despite a recent 15% pullback. If Asian inflation data continues to climb, it could block further earnings growth and trigger another sell-off. Buying puts on broad emerging market ETFs could serve as an effective hedge against this specific risk in the coming weeks.
