Global equity markets are dangerously overconfident
Global equity markets show a dangerous disconnect by continuing to rally – fueled by an overconfidence in policy backstops – despite the severe and persistent supply-side risks caused by the ongoing energy shock from the closure of the Strait of Hormuz, says Helen Thomas
There is a growing disconnect between the resilience of global equity markets and the risks building from the ongoing energy shock caused by the closure of the Strait of Hormuz. Investors have continued to push risk assets higher, unerringly confident that policymakers can contain the fallout even as the scale and persistence of the disruption suggest otherwise.
That confidence is perhaps best captured by the remarkable recovery in US equities. The S&P 500 has moved from a nine per cent drawdown to record highs in just 11 trading days, marking the fastest recovery of its kind since at least 1990. Such price action would normally imply a sharp improvement in underlying fundamentals. Instead, it has taken place alongside one of the most significant supply-side shocks in global energy markets in decades.
The scale of the disruption is difficult to dismiss. Fifty days into the conflict, an estimated $50bn of crude oil supply has been lost. Analysis from Wood Mackenzie suggests this is equivalent to removing all road travel globally for 11 days. This is not a shock that can be treated as a temporary geopolitical risk. It is beginning to affect physical supply, logistics and industrial planning.
While the UK has yet to feel the full impact, strains are already evident elsewhere. Media reports celebrating the arrival of oil cargoes in Japan and diesel shipments into Australia are only masking a harsher reality: many of these deliveries represent little more than a day’s worth of supply. Rather than signalling stability, they highlight how thin the margin for disruption has become. With efforts to de-escalate the conflict yet to reopen the Strait of Hormuz, those pressures are unlikely to fade quickly.
Markets nevertheless continue to trade as though this can be absorbed, in part because investors have become conditioned to expect a policy backstop. A belief has taken hold that US President Donald Trump will intervene to support markets if financial conditions tighten materially. That assumption has been reinforced since last year’s sharp reversal following the pause after the Liberation Day tariffs, embedding a view that being underinvested in risk assets carries more danger than the risks themselves. There is now a Pavlovian response of “Don’t Get Caught Short”.
The limits of policy
The problem is that this assumption may overestimate what policy can realistically achieve in a supply shock. Political support can stabilise confidence, but it cannot replace disrupted oil flows, accelerate fertiliser deliveries into Asia ahead of sowing season, or offset shortages that begin feeding through into food and industrial supply chains. Financial markets may be pricing a demand shock playbook into what is fundamentally a supply-side event.
That distinction matters for central banks as well. Investors have increasingly looked to this week’s meetings from the Federal Reserve, European Central Bank and Bank of England for reassurance, but policymakers have signalled far less willingness to provide it. ECB Governor Christine Lagarde has already made clear that uncertainty over the duration and breadth of pass-through effects argues for caution, not pre-emptive action. In the UK, the Bank of England Deputy Governor for Financial Stability, Sarah Breeden, has gone further, warning in a recent speech “History suggests that the most dangerous moments are not simply those when risks are high – but those when they are too easily dismissed. Our task is to ensure that they are not”.
That leaves a more uncomfortable possibility: that markets are relying on policy tools ill-suited to the nature of the shock.
This matters particularly because the implications go beyond oil. Sustained energy scarcity affects transport, fertiliser, agriculture, manufacturing and inflation expectations. It also raises questions for sectors that have led this year’s rally. The valuations of the Magnificent Seven have been built in part on expectations of rapid adoption of energy-intensive artificial intelligence infrastructure. That thesis depends not only on demand for AI, but on abundant and affordable power to support it.
This week’s earnings may therefore offer a more grounded test of whether markets are too complacent. Results from BP, ExxonMobil and Chevron should provide insight into how energy producers view the persistence of supply constraints. At the same time, we receive earnings updates from five of the so-called Magnificent Seven technology firms which may indicate whether rising energy risks are beginning to affect assumptions underpinning AI-led growth.
The broader issue is not that markets are wrong to expect policymakers to respond, but that they may be assigning too much weight to financial rescue mechanisms in the face of a physical supply shock. That has created an unusual divergence between buoyant asset prices and deteriorating energy fundamentals.
History suggests those divergences rarely persist indefinitely. Either the shock proves less severe than current evidence implies, or markets will need to adjust to risks they have so far largely chosen to ignore. At current valuations, investors appear heavily positioned for the former. That may prove a much more fragile consensus than recent record highs suggest.
Helen Thomas is founder and CEO of Blonde Money