Over the past few weeks, we have witnessed a growing disconnect between geopolitics and macroeconomics.
On one hand, geopolitical tensions have eased somewhat as the probability of a diplomatic agreement between the United States and Iran has gradually increased following recent negotiation progress.
On the other hand, macroeconomic reality has once again reasserted itself: the energy shock threatens to entrench inflation and make it persistently higher.
Within this environment, U.S. equities once again demonstrated their leadership relative to Europe and Asia, supported by the resilience of the technology sector and significantly stronger corporate earnings expectations.
While the S&P 500 and Nasdaq advanced by 5.2% and 10.5% respectively, Europe displayed greater weakness due to its vulnerability to the energy shock and a more fragile macroeconomic backdrop.
Asia, meanwhile, remained broadly stable but lacked clear catalysts capable of accelerating growth.
United States: The “Warsh Effect” and the Repricing of Expectations
The transition at the Federal Reserve has not been a smooth one.
Kevin Warsh assumed the Fed Chairmanship amid accelerating inflation, with CPI rising from 3.3% to 3.8%.
The market reaction was immediate:
Expectations for interest rate cuts in 2026 have largely disappeared, and investors have begun pricing in the possibility of a rate hike before year-end.
As expected, this shift has placed upward pressure on sovereign bond yields, resulting in corresponding declines in bond prices.
On the corporate front, NVIDIA once again demonstrated its financial strength by delivering solid earnings and raising future revenue guidance, confirming that the artificial intelligence investment cycle remains fully intact.
However, the relatively muted market reaction suggests that investors are increasingly demanding evidence that these extraordinary growth rates can be sustained over the long term.
The major distraction of the month, however, comes from space.
The anticipated IPO of SpaceX has captured investor attention.
With an estimated valuation approaching $1.75 trillion, the offering has the potential to become one of the largest public listings in history and is helping reignite enthusiasm for technology and aerospace-related risk assets.
Europe: Imported Inflation and the Defense Paradox
Europe shares many of the same macroeconomic challenges as the United States.
Inflation accelerated from 2.6% to 3.0%, driven primarily by rising energy prices following disruptions in oil markets related to the Iran–U.S. conflict.
This dynamic points toward renewed pressure throughout production and supply chains.
Perhaps the most ironic development of the month occurred within the defense sector.
Despite the ongoing Russia–Ukraine conflict — where ceasefires remain limited primarily to humanitarian corridors — major defense companies experienced significant corrections.
A combination of profit-taking following a powerful rally and a gradual reduction in the geopolitical risk premium helps explain this move.
Market performance across Europe was mixed:
- MSCI Europe gained 2.6%.
- Euro Stoxx 600 declined 2.4%.
Asia: Transactional Diplomacy in Beijing and Modi’s Strategic Tour
Asian markets were dominated by high-level political developments.
Particular attention was given to President Donald Trump’s visit to Beijing, accompanied by a select delegation of executives from companies such as NVIDIA, Apple, and Boeing.
The visit highlighted an increasingly transactional approach to bilateral relations amid elevated trade tensions.
Discussions with President Xi Jinping focused on several key topics:
- Market access for U.S. companies.
- Semiconductor technology.
- Artificial intelligence.
- The ongoing Taiwan question.
Beijing seeks regulatory stability and access to advanced technologies.
Washington seeks agricultural and industrial concessions.
This mutual interdependence was digested relatively positively by risk assets.
Meanwhile, Indian Prime Minister Narendra Modi completed a diplomatic tour across Northern Europe and Italy aimed at strengthening strategic and commercial ties with the European Union.
Market performance remained mixed:
- MSCI China declined 3.4%.
- MSCI India fell 0.7%.
Portfolio Implications: The Virtue of Ignoring Background Noise
The experience of the past two months provides an important lesson for portfolio management:
Patience often defeats panic.
Maintaining equity exposure throughout April and May allowed portfolios not only to recover the losses experienced in March but also to exceed valuation levels reached at the end of February.
The key was isolating investment decisions from geopolitical noise and temporary volatility events.
Within the field of behavioral finance, popularized by Nobel Prize winner Daniel Kahneman and psychologist Amos Tversky, the concept of recency bias describes our tendency to overweight recent events while underestimating historical context.
Following the March correction, the emotional brain — driven by the desire to avoid immediate pain — irrationally encouraged investors to reduce risk due to fears of further losses.
However, analytical reasoning reminds us that after severe capitulation events, the statistical probability of another equally large decline occurring immediately afterward tends to decrease substantially.
Unlike savers, investors understand that volatility is not a punishment or bad luck.
It is the price paid for achieving returns that exceed inflation.
Current Strategy: Summer Prudence
Nevertheless, optimism should remain measured.
At Asset Growth, we recognize that much of the recent market advance has been driven by the strong performance of a small number of technology giants — the now-famous Magnificent Seven.
As we move into the summer period, we believe a more cautious approach is warranted.
Our current recommendation is to begin selectively taking profits and marginally reducing equity exposure in portfolios in order to preserve capital against what we expect will remain a persistently volatile environment.
As soon as we identify that current valuations are no longer supported by the actual earnings power and growth capacity of the companies that compose the major indices, we will recommend initiating this strategic reduction in risk exposure.