Global Stocks Hold Near Record Highs as Investors Look Past Middle East Tensions

By COMFORT OGBONNA

Global stocks remained close to record highs on Friday and were on track for a third consecutive weekly gain as softer U.S. inflation and employment data reduced expectations of another Federal Reserve interest-rate increase next month.

Investors largely maintained their appetite for risk despite renewed geopolitical tensions in the Middle East, where stalled efforts to end the conflict have pushed oil and natural gas prices sharply higher.

The combination of easing monetary-policy concerns, strong corporate earnings and continued enthusiasm around artificial intelligence has helped support equities in recent weeks. At the same time, investors have so far shown limited concern about the potential economic consequences of higher energy prices and growing tensions between the United States and Iran.

Oil and gas prices were heading for substantial weekly gains as negotiations remained stalled and the United States threatened to increase economic pressure on Iran, including potentially maintaining a naval blockade.

Brent crude was up about 1.7% at $88.50 a barrel and was on track for a weekly gain of roughly 6%. European natural gas prices were heading for an increase of about 10%, while U.S. natural gas futures were set for a gain of around 3.5%.

Higher energy prices can eventually feed into inflation, transportation costs and household expenses, creating a potential challenge for central banks. For now, however, investors appear confident that the recent rise in commodity prices will not derail the broader economic outlook.

The MSCI All-World index traded just below its record high and was heading for a third consecutive weekly advance.

European shares were slightly lower, with declines in technology stocks offset by gains in sectors such as defense and automobile manufacturing.

The relative calm in financial markets has surprised some investors given the geopolitical uncertainty.

Kyle Rodda, a strategist at Capital.com, said markets were ending the week on a positive note with relatively few major economic or corporate events scheduled. He cautioned, however, that geopolitical tensions could intensify over the weekend as U.S.-Iran rhetoric escalates.

For now, geopolitical uncertainty remains one of the few significant obstacles to markets that are otherwise benefiting from strong corporate earnings and expectations for a less restrictive monetary environment.

Investors have also been encouraged by signs that inflation pressures remain manageable.

Short-term bond yields have increased during the week, but the move has been relatively modest. Several market-based measures of inflation expectations have also continued to decline, reducing concerns that higher energy prices will immediately lead to a renewed surge in consumer prices.

Gold prices have also remained relatively strong, despite the fact that the metal generally becomes less attractive when interest rates rise.

The decline in expectations for aggressive rate increases has helped support demand for gold from both investors and central banks.

Gold was down about 0.1% at $4,346 an ounce on Friday but remained on track for its strongest monthly performance since February.

The decline in market volatility has provided another indication of investors’ confidence.

The VIX volatility index, widely regarded as a measure of expected stock-market turbulence, was heading for a fourth consecutive weekly decline. That would represent its longest run of weekly declines since May 2025.

A separate measure of volatility in the bond market was also heading for its second consecutive weekly decline.

The subdued volatility suggests investors have not significantly increased the risk premiums they demand despite the continuing uncertainty surrounding the Middle East.

John Sidawi, senior portfolio manager for fixed income at Federated Hermes, said financial markets had displayed a growing disconnect between geopolitical uncertainty and asset-price volatility.

Investors appear willing to tolerate a considerable amount of uncertainty without dramatically reducing exposure to stocks or demanding substantially higher returns for taking risk.

That calm, however, may not last indefinitely.

A significant escalation in the Middle East conflict could force investors to reassess the economic outlook, particularly if it causes a prolonged disruption to energy supplies. On the other hand, a clear path toward a ceasefire could also trigger a sharp adjustment in markets as investors reposition for changing economic conditions.

Currency markets were also influenced by expectations for changes in monetary policy.

The Japanese yen strengthened against the dollar, which fell about 0.2% to 159.18 yen. The move followed reports that the Bank of Japan could consider raising interest rates as early as September.

The yen remains close to the 160-per-dollar level, which traders view as a potential trigger for additional intervention by Japanese authorities.

Japan has already taken steps to support the currency, but previous efforts failed to produce a lasting recovery.

The yen’s prolonged weakness has been linked in part to the Bank of Japan’s cautious monetary-policy approach and relatively low interest rates compared with other major economies.

Padhraic Garvey, head of global rates and debt strategy at ING, said the yen’s weakness reflected the gap between Japan’s currency pressures and the central bank’s reluctance to raise rates quickly.

A faster increase in Japanese interest rates could support the yen by making Japanese assets more attractive, although it could also place additional pressure on the country’s economy.

The Bank of Japan therefore faces a difficult balance between supporting economic activity and preventing excessive weakness in the currency.

For global investors, the currency movement adds another layer of uncertainty to an otherwise relatively calm trading environment.

The broader market remains focused heavily on corporate earnings and artificial intelligence. Strong results from major technology companies have helped ease concerns that the enormous amount of money being invested in AI infrastructure could eventually produce disappointing returns.

Investors are increasingly looking for evidence that spending on data centers, computing power and AI systems is translating into stronger revenue and profits.

So far, earnings have provided enough reassurance to keep investors engaged with the technology sector and the wider stock market.

The resilience of equities in the face of geopolitical tensions suggests that investors currently believe economic growth and corporate earnings remain strong enough to absorb the risks.

However, the combination of higher energy prices, large government borrowing needs, currency pressures and geopolitical uncertainty could eventually test that confidence.

For now, markets continue to look through those risks. Stocks remain near record levels, volatility is subdued and expectations for monetary policy have become more supportive.

The question for investors is whether that calm can continue if the conflict in the Middle East worsens or if rising energy prices begin to affect inflation and economic growth more significantly.