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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the Rene M Kern professor of practice at Wharton School, chief economic adviser at Allianz and chair of Gramercy Funds Management
A string of record highs for the US stock market might have seemed unlikely to many investors at the start of the year if they had known what was coming — a military conflict in the Middle East, a surge in global energy prices, serious disruptions to maritime supply chains and a mounting risk of global recession.
After all, conventional wisdom dictates that such “geoeconomic” dislocations undermine corporate earnings expectations, increase investor risk aversion and suck capital out of stocks and into “safe assets” such as government bonds, gold and cash. Instead, we find ourselves in the opposite situation, a twilight zone of sorts.
While the time horizons for a resolution of the war continue to be pushed out and the Strait of Hormuz remains essentially shut, US stock market indices have gone from record to record on the back of — wait for it — higher corporate earnings and greater risk appetite. In the process, the start-of-year consensus trade has been negated.
A commonly held view among investors and analysts in January was that there would be a pivot in 2026 away from “expensive” US equities towards the “value” found in the rest of the world, particularly Europe. After all, the valuation gap between the S&P 500 and the Stoxx Europe 600 has dramatically widened.
This thesis was derailed by the harsh reality of geoeconomics. The Middle East war laid bare the structural vulnerabilities of the European economy. The region has a heightened sensitivity to the energy shock, not just a price surge but also the threat of physical supply shortages. That and vulnerability to other disrupted supply chains transformed attractive valuations into more of a value trap. Meanwhile, the US emerged as a market of choice as investors rewarded the economy’s relative energy independence and longstanding structural strengths.
The increasing tech dominance of the US economy has been equated by many to its robust macro fundamentals. In addition to breathtaking tech innovations that deliver productivity gains, America continues to benefit from a unique combination of corporate and labour market flexibility, deep capital markets, significant fiscal support and a central bank more hesitant to raise rates. The seemingly abundant availability of risk capital enhances the economy’s dynamism, allowing its corporate sector to navigate disruptions more effectively.
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The concentration of market leadership in a handful of tech groups has provided the broader market indices with a shield. These companies are not just growth plays; a few of them are also cash flow machines with fortress balance sheets that make them appear less like cyclical and more like essential infrastructure for the modern economy. Their ability to generate earnings growth regardless of the geopolitical climate has decoupled the broader US indices from the malaise affecting the rest of the world.
Yet what results in relative dominance need not guarantee the continuation of a record-breaking run in absolute terms. There is a geoeconomic ceiling to even this market rally, and we will get there if the war is not resolved.
Already, we are approaching the point where the price and availability of energy will breach thresholds in an increasing number of economies unable to comfortably absorb them. Meanwhile, the upcoming reduction in investible capital from the Gulf countries will temporarily sap US markets from a previously large supplier of sophisticated funding.
Then there is the risk of “valuation fatigue”. The US premium has reached a point where even minor misses in earnings or slight delays in the AI rollouts and its broad diffusion could trigger a significant repricing.
The current gap between market performance and geoeconomic realities requires a delicate balance between acknowledging the advantages that the US offers while also remaining aware of the mounting challenges to economic wellbeing.
The US may have decoupled from the global gloom for now but there are domestic limits to the economy’s resilience and agility. Moreover, in a still interconnected world, total economic and financial insulation is an impossibility. While the US is undeniably the cleanest shirt to pick from in the laundry of advanced economy markets, even that eventually will show signs of wear if the geoeconomic environment remains harsh.
