Stephen Dover: Are markets complacent?

by Stephen Dover, CFA, Chief Market Strategist and Head of Franklin Templeton Institute at Franklin Templeton

In a recent (unscientific) Franklin Templeton social media poll, we asked investors what they felt was the biggest risk to the global economy over the next 12 months. Nearly half (45%) of respondents highlighted high oil prices as their greatest fear factor. A bursting of an artificial-intelligence (AI) bubble or private-credit defaults lagged significantly behind in their list worries.

We saw a similar response earlier this month when we polled our firm’s chief investment officers (CIOs). They agreed that high oil prices pose the chief risk to the global economy and financial markets in 2026.

This month, Brent and West Texas Intermediate crude oil prices have become stuck around US$100/barrel, up nearly 40% from their pre-war levels. Prices of various distillates, including diesel and jet aircraft fuels, are up 60% or even more. The Strait of Hormuz remains effectively closed, meaning that physical stocks of crude oil, liquified natural gas, and distillates could be depleted in parts of Asia or Europe within months. And given both the damage to production in the Persian Gulf region, as well as the lead times between production, transportation and delivery (estimated at three months or longer), a scramble for short supplies later this year may be unavoidable.

And yet over the past few weeks global equity markets have rebounded sharply, overcoming their war-related setbacks in March. Credit spreads, the euro and other asset prices have also snapped back. Markets appear to be shrugging their collective shoulders.

What’s going on? Are markets complacent with the risks identified by our clients and our CIOs? Or are there fundamental reasons behind the markets’ recoveries?

Here’s our take:

• Global growth will likely be impacted. This month the International Monetary Fund (IMF) and various private sector research groups have trimmed their 2026 real gross domestic product (GDP) forecasts, with Europe and Asia seeing some of the biggest downgrades.
• But there are offsets. In the United States, Europe and Japan, fiscal expansion should ease some of the pain. In the United States, higher-income households, which account for over half of consumption (the top 20% of US households by income are responsible for 60% of all consumer spending¹) could see their purchasing power boosted by tax refunds and wealth gains. Also, the global momentum behind capital expenditures on AI, energy infrastructure and supply-chain management offers the US and world economies a powerful set of tailwinds.
• The United States is more resilient. The rapid diffusion of new technologies, above all AI, appears to be boosting US productivity. After averaging a modest 1.3% annual average growth rate from 2010–2019, US non-farm labor productivity has accelerated to 2.5% over the past two years.² Accelerating productivity makes the US economy stronger and more resilient. A second source of resilience is the smaller share of US GDP devoted to energy expenditures. Since the late 1970s, energy consumption per capita in the United States has fallen by 20%, while rising domestic production has turned the country from a hydrocarbon importer to an exporter. Accordingly, the economy has become less sensitive to energy price shocks.³
• Central banks will likely respond with caution. Notwithstanding higher prices today for energy and forthcoming price increases for food and other goods and services, central banks are likely to respond cautiously. One-time price increases stemming from energy supply shocks typically fade, and some slowing of growth is likely. Hence, central banks will be reluctant to raise interest rates aggressively. Moreover, markets have already discounted rate hikes where they are most likely—in Europe and Japan.
• Corporate earnings growth is stellar. Throughout first quarter 2026, and even as the war commenced, analysts were busy upgrading already-robust 2026 profits estimates.⁴ Information technology and financials, alongside energy, have seen the biggest upward revisions. After the first two weeks of the earnings season, “beats” remain healthy and S&P 500 earnings per share are tracking 15% higher year-on-year.⁵
• The bears have been burned before. The behavior of markets is also psychological. Sentiment may reflect concerns (as highlighted in our surveys), but investors also remember the pain of selling aggressively following the “Liberation Day” tariffs of 2025, only to see a sharp policy and market reversal. Subdued selling during the war, therefore, partly reflects the concern that sellers could be caught “offside” by quick turns in politics or diplomacy. As remote as an agreement to open the Strait of Hormuz may seem today, being overly pessimistic is not without its own risks. That “uncertainty dynamic” has kept volatility and selling pressure at bay relative to the magnitude of the shipping disruption from the Persian Gulf.

In short, world economy and financial markets find themselves in a tenuous position. The status quo of restricted supplies of energy and petro-products because of the closed Strait of Hormuz is unsustainable. And the clock is ticking toward acute economic pain.

Yet we believe the incoming fundamentals remain strong—above all the health of corporate profits. And in the United States at least, economic growth momentum remains intact, in our analysis. Lastly, investors have been conditioned to not overreact, a behavior which dampens volatility.

But all that only describes a near-term stalemate of competing forces. Sustained market stability can only arrive via a durable resolution of the conflict, one that permits a credible and lasting reopening of one of the world’s most vital waterways. Until that happens, investors should not be complacent about risk, and particularly not today as the US equity market flirts with fresh all-time highs.

Overall, our investment strategy remains intact. The cornerstone is a broadening of opportunity, underpinned by strong earnings growth in the United States and emerging equity markets, coupled with long-term returns via durable capital expenditures in global energy infrastructure and national defense/security. Within fixed income markets, we remain cautious on duration with a preference for coupon-based income in high yield. Municipal bonds also potentially offer tax-advantaged sources of income for US investors. Finally, a combination of high real yields in Brazil, sound fiscal fundamentals in Asia and a stable-to-weaker US dollar supports our commitment to local currency emerging market debt.

Endnotes

1. Source: “Have U.S. consumers gone “K-shaped”? A review of the data.” Federal Reserve Bank of Minneapolis March 20, 2026.
2. Source: “Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Workers (OPHNFB).” Federal Reserve Economic Database (FRED). March 24, 2026.
3. Source: “U.S. Energy System Factsheet.” Center for Sustainable Systems, University of Michigan.
4. There is no assurance that any estimate, forecast or projection will be realized.
5. Source: “Earnings Insight.” FactSet. April 24, 2026..

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