Equity markets remain optimistic about de-escalation as earnings season approaches

Markets are increasingly trading on optimism around the Middle East ceasefire, with equities pushing higher as investors lean into the narrative that the agreement will hold and that the worst of the energy shock may be behind us. The rebound across major indices reflects a clear shift from pricing escalation to pricing stabilisation. However, this move appears to be driven more by sentiment and positioning than by a meaningful improvement in underlying fundamentals, leaving markets exposed should that narrative be challenged.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.

Looking at the charts, the recovery has been technically constructive but still tentative. The S&P 500 has reclaimed the 6,700–6,800 region, moving back above key moving averages and reversing much of the recent breakdown, while the Nasdaq 100 is showing a similar recovery, pushing back toward resistance after a sharp drawdown. Meanwhile, the DAX has bounced strongly from its lows, reflecting improved global risk appetite. Momentum indicators such as RSI have recovered from oversold territory, suggesting the worst of the recent selling pressure has eased. However, these indices are now approaching key resistance zones, which could act as a ceiling if the fundamental backdrop fails to improve.

The key issue is that markets are effectively front-running a positive outcome by assuming that the ceasefire will translate into a durable de-escalation and a normalisation of energy markets. Oil’s pullback supports that view, as the risk premium tied to supply disruption has begun to unwind. But this remains a fragile assumption. The ceasefire is still in its early stages, and the structural drivers of the conflict, particularly around the Strait of Hormuz, have not been fully resolved. Any deterioration in the situation could quickly reverse the current risk-on positioning.

That’s why the focus may now shift toward the upcoming earnings season, which will provide more concrete evidence of how companies are navigating this environment. So far, equity markets have largely looked through the potential impact of higher energy costs and tighter financial conditions. But margins are likely to come under pressure, particularly in energy-intensive sectors, as input costs have risen and may not yet be fully reflected in corporate guidance. If earnings confirm that companies have been able to absorb or pass on these costs, the current rally could find further support. However, if margins begin to compress or guidance is revised lower, it could challenge the market’s optimistic stance.

In essence, equities are currently trading on hope rather than confirmation. The ceasefire narrative has been enough to stabilise sentiment and drive a rebound, but the sustainability of that move will depend on both geopolitical developments and the hard data coming through earnings. Until then, markets are likely to remain sensitive to headlines, with the balance of risks still tilted toward volatility rather than a clear, sustained trend.