Most assets have returned to pre-war levels, IMF maintains economic growth forecast for 2027! Betting on the risk of conflict in the Middle East is seen as the most popular option.

Global investors and the International Monetary Fund (IMF) seem to believe that the likelihood of the Middle East war has ended - all that remains is verbal quarreling. The energy market, on the other hand, is less certain, and there may still be a lot of "war of words" in the future. However, many asset prices have returned to their original levels, and the market currently believes that the impact of the conflict is only at a marginal level. IMF's arduous task of predicting global economic growth during the Middle East war and energy shock period leaves behind as many questions as answers, accompanied by a plethora of different scenario assumptions. But the most significant aspect of the fund's core conclusions may not be what it has done, but what it hasn't done. Compared to the last update in January (the three months before the war), IMF has not made any adjustments to its forecast of global GDP growth in 2027. Although IMF has revised down this year's global economic growth forecast - resulting in a lower base, the organization's growth forecast for next year is consistent with that of January, and even as far back as October last year - with global GDP growth at 3.2%. Even before IMF released these forecasts on Tuesday, many market participants had already reached the same conclusion. On Monday, the US stock market had rebounded to pre-war levels of February 27, completing a round trip rally of 565 points, nearly 10%. The "fear index" VIX, measuring implied volatility, had fallen to its lowest level since February. The MSCI global index tracking global stock markets has not fully returned to pre-war levels, but is only 1% away from the historical high set two months ago. The key euro/dollar exchange rate has also returned to the levels of February. In recent weeks, a widely discussed issue among investors is the minimal impact of the oil price shock on full-year corporate earnings forecasts. Driven by upward revisions in profit expectations for technology and energy companies, overall profit growth expectations for 2026 have increased by 2 to 3 percentage points since the start of the war. Profit growth expectations for US and European blue-chip stocks in 2027 remain high at 18% and 11% respectively. Meanwhile, in the month leading up to early April, future 12-month price-to-earnings valuations for the S&P 500 and MSCI global index had decreased by over 10%. Ignoring the war, betting on a de-escalation of the situation, and focusing on the logicality of the next year, is hard to resist by the markets. This logic is what prompted the world's largest asset management company, BlackRock, to reallocate to overweight US and emerging market stocks this week. BlackRock believes that the impact of the Middle East war has been effectively controlled, coupled with strong corporate earnings, creating a favorable environment for the US domestic stock market. BlackRock has upgraded its rating on US stocks from "neutral" to "overweight". The firm noted that the dawn of a lasting ceasefire has led strategists to believe that the impact of this war will not be significant. Furthermore, the threshold for the US and Iran resuming war is high, further limiting potential damage. Meanwhile, the outlook for corporate earnings looks positive. More importantly, profits in the technology sector are expected to increase significantly by 45% this year, although the sector's actual growth this year is minimal. "A Dangerous Moment" Of course, this does not mean that nothing has changed. As global oil and gas remain constrained by the blockage of the Strait of Hormuz - where the US and Iran are competing for control over this global energy transport chokepoint, recent months have seen a one-third rise in crude oil futures prices, as aviation fuel, gasoline, diesel and other refined oil prices soar, while natural gas and fertilizer prices remain high. Interest rates and bond markets have not returned to pre-war levels - the persistent risk of rising inflation and the possibility of central banks raising rates again to curb inflation remain. The 10-year US Treasury bond yield is currently about 30 basis points higher than in February, and futures markets estimate only a 30% probability of the Federal Reserve resuming rate cuts before the end of the year. Mortgage rates have also risen significantly, while corporate bonds have been affected by fluctuations in the private credit market. A survey of global asset management institutions conducted by a US bank this month has shown a significant retreat from bullish sentiment earlier this year, with sentiment indicators falling to lows not seen since last summer, and inflation expectations rising. Even the IMF acknowledges that the longer the Middle East energy shock persists, the more likely its "adverse scenarios" will become reality. Billionaire investor Ken Griffin warned on Tuesday that this is a "dangerous moment," and believes that the closure of the Strait of Hormuz for 6 to 12 months would lead to a global economic recession. However, looking at the trend of crude oil futures, this is still not the main prediction of the market. The trend of Brent crude oil futures for this year and next year suggests that prices are gradually returning to normal. The weighted average forecast for crude oil prices at the end of the year is $84 per barrel. Although this is still 10% to 15% higher than in February, a quick estimate model shows that this would only reduce global GDP growth by 0.2 to 0.3 percentage points. This is not enough to shift portfolios into risk-off mode - regardless of one's views on broader inflation or political consequences. Among the funds surveyed, less than 10% expect a recession in the future. Although the average cash levels last month were at a 10-month high, they were still significantly lower than the extreme levels seen during the tariff shocks in April last year or the Russia-Ukraine conflict in 2022. All signs indicate that this is not entirely about market complacency - but it is also not a panic stampede. While market judgements on the conflict trend will continue to be a daily focus, and increasingly insensitive to price changes, a "downgrade reaction" at the market level has already begun. Whether this is premature or not, only time will tell.