Investors worrying over geopolitical flare-ups may be missing the bigger driver of returns: corporate earnings. While headlines remain dominated by the Gulf conflict and its potential to disrupt energy markets, history suggests it is profits rather than politics that ultimately dictate market direction over the medium term.
That is not to downplay the risks. Oil price volatility, supply chain disruptions and renewed inflation fears are all credible threats but stock markets are, by design, forward-looking. Unless geopolitical shocks translate into a sustained hit to earnings, their impact tends to fade quickly.
The more pressing question is whether expectations for corporate earnings are already too high. After a resilient 2025, analysts pencilled in solid earnings growth across most major indices, underpinned by easing inflation, stable consumer demand and continued investment in AI-led productivity gains.
That may yet prove optimistic. Higher energy costs, if sustained, will squeeze margins. At the same time, borrowing costs remain elevated and wage pressures have not fully subsided. For many firms, particularly in energy-intensive sectors, the room for error is increasingly narrow.
Yet there is a counter argument to this. Corporate balance sheets are generally still in decent shape, and many companies have shown an ability to protect margins through both pricing power and efficiency gains. The AI investment cycle, meanwhile, also continues to provide a structural tailwind for certain sectors.
For investors, the message is clear. Geopolitics can set the mood, but earnings drive the outcome. If profits hold up, markets can absorb a great deal of noise. The real risk therefore may not be conflict itself, but that expectations fail to adjust to what becomes a more challenging backdrop for earnings.
Capital at risk. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
