Above the Noise: Investor angst and market endurance

Before the recent escalation between the US and Iran, I planned to open this month’s Above the Noise on a more personal note. My oldest daughter turns 18 later this month. From the moment my daughters were born (her younger sister is 15), I was warned repeatedly about the teenage years. There’s simply a lot going on at that age, emotionally, socially, and mentally, much of it beyond their control. 

That perspective often shapes how I think about markets. There’s always a lot going on. Every cycle brings its own set of worries, shocks, and narratives that test our nerves and demand our attention. The developing conflict between the US and Iran is simply the latest in a long list of events that have unsettled investors over time. 

With the situation still in its early stages, I want to make three key points. 

First, history is instructive. Markets have generally proven resilient following geopolitical shocks. Often, stock markets have delivered positive returns in the 12 months after major military events. We examined 11 points in history where we experienced a peak in the Geopolitical Risk Index — from the 1962 Cuban Missile Crisis to the 2023 Israel/Hamas conflict — and the return of the S&P 500 Index 12 months after that peak. In most cases, the stock market rose in the year following peak geopolitical risk, with an average rise of 15.3% across all 11 conflicts.¹

Second, as a market strategist, I always view events like these through a consistent lens. Does this materially change the trajectory of global growth or central bank policy? In most cases, the answer is no. For that to change now, we’d likely need to see a prolonged closure of the Strait of Hormuz, where roughly 20% of the world’s oil supply flows, and a sustained surge in oil prices.² Prolonged and sustained are the operative words. While that risk exists, it’s not our base case. 

Third, the global economy today is less dependent on oil than in past decades, and oil supply growth was already expected to outpace demand this year.³

As a result, we aren’t changing our positive view on stocks, but we’ll be watching developments closely as events unfold.

Phone a friend

I’ve received enough questions on AI this month that I phoned two friends to talk about it! 

Is the AI bubble bursting? I posed the question to Justin Livengood, a Senior Portfolio Manager for Invesco’s Midcap Growth strategy. His response:

“No, and I don’t believe there’s an AI bubble to burst. Parts of the market got ahead of themselves and are now correcting. That’s an important distinction. What we’re seeing right now feels much more like a reset in positioning, sentiment, and valuation rather than a collapse in the underlying AI thesis.

There were some excesses built up in areas like software. Many of those companies are still grappling with uncertainty about business models, pricing power, and how AI ultimately reshapes demand, and there aren’t yet clear catalysts to reverse that narrative. In short, the market has become more discriminating.

The drivers of demand appear to still be real, however. Capital spending is still happening, and the biggest players funding this cycle have extremely strong balance sheets.⁴ If this were a true bubble bursting, then you’d expect to see capital spending freeze and earnings visibility collapse across the ecosystem. We’ve been seeing the opposite in semiconductors, infrastructure, and power-related areas.”

Why have stocks of select asset managers focused on direct lending and private credit declined sharply this year? I posed the question to Ronald Kantowitz, Head of Private Debt for Invesco's global private credit group. His response:

“Software has long represented one of the largest exposures within direct lending, often comprising 25% or more of industry commitments.⁵ The sector has historically benefitted from recurring revenue, healthy margins, and strong free cash flow.⁶ Recently, sustained capital deployment pressure has driven valuations and leverage higher, as well as diluted the effectiveness of lender documentation.⁷ As recent volatility across software credits has demonstrated, disciplined underwriting and conservative structures matter. 

It was said

“The Dow is over 50,000 right now. The S&P is almost at 7,000, and the Nasdaq is smashing records.” – Pam Bondi, US Attorney General

This one lets me get to one of my favorite points. Yes, the Dow Jones Industrial Average did briefly hit 50,000. And 1.5 years ago, it hit 40,000 under President Biden. And 3.5 years before that, it hit 30,000 during President Trump’s first term in office. And four years before that, it hit 20,000 during President Obama’s term.⁸

This shouldn’t be a surprise. Stock market averages are reflective of the growing economy in the US and the world. If we believe that the world will continue to get better, then we expect markets to trend upward over long periods and to hit many new highs, regardless of who’s president.

Think/rethink

What’s an assumption that many people think is correct, and what’s the actual story?

Think: The size of the US debt is unsustainable, and investors are increasingly losing their appetite to invest in US Treasuries.

Rethink: The US Treasury sold $25 billion of 30-year bonds at the February 12 auction, with a bid-to-cover ratio of 2.66, meaning that there was 2.66x more money wanting to buy the bonds than bonds available.⁹

On the road again

My 2026 travel has already taken me to Orlando, Phoenix, Austin, Chicago, Atlanta, Orange County, and Palm Beach. It sounds like a Huey Lewis and the News song! Perhaps I shouldn’t have told my wife during COVID-19 that virtual meetings will henceforth replace travel. The Who’s final tour was never really the final tour. I’m not complaining. I’m thrilled that clients still want to meet in person. Perhaps AI isn’t replacing human connection just yet!