Iceland, Institutional
Change
Market leadership has shifted in 2026, challenging some of the most reliable winners of the post pandemic, AI-led cycle. After three years of dominance by technology and communication services, year-to-date (YTD) returns point to a sector rotation as investors reassess valuations, earnings durability and the macro backdrop.
This shift was already under way before the conflict in the Middle East. The MSCI World Index remained in positive territory for most of the past three months, but previously out-of-favour sectors such as materials and consumer staples contributed more to gains while prior leaders lagged. Since the start of the US-Iran conflict, global stock returns have faced a rough ride with the notable exception of the energy sector, as shown in Figure 1. While the recently announced truce has since prompted a relief rally, this may be only temporary as markets increasingly worry about the risk of an energy-driven macro shock in the absence of a more lasting resolution.
Beyond the initial oil price impulse, we are focused on whether the pre-crisis broadening trend holds up or reverses with energy stocks as the likely new market leaders.
Investment implications
- Shifting return drivers. Regional equity narratives that dominated 2025 — most notably fading US exceptionalism and renewed optimism on Europe’s prospects — may give way to an energy shock-driven perspective. Regional sector composition may magnify this shift: for instance, Europe’s higher index weight in financials and cyclicals, which have historically been more sensitive to oil shocks, could be a headwind for relative returns.
- Evolving AI narrative. Rapid advances in AI are still creating winners and losers but the market’s reaction function appears to be evolving. Competitive pressure is becoming more visible in parts of the software industry, while the response to continued strength in AI-linked earnings has been more muted. Longer-term, broader adoption will likely widen the potential set of beneficiaries.
- Market volatility. Prior to the start of the US-Iran war, we already observed a significant uptick in volatility at the sector and stock level, even if the overall market appeared stable. While index volatility has picked up since the start of the conflict in the Middle East, the underlying sector and stock rotation appears to persist.
- Diversification and active management. Periods of volatility and leadership rotation tend to generate risks and opportunities that active managers may be able to exploit. Specifically, a persistent energy shock is likely to accelerate infrastructure spending in Europe and Asia and drive innovation in fossil fuel substitution across a wide range of sectors.
What we are watching
- Energy prices and geopolitical (de-)escalation. The next stage in the US-Iran war will be critical in determining the length and severity of the energy supply shock, with markets looking for a credible path towards de-escalation and stabilisation.
- Market breadth beneath the index. We are watching whether the dispersion across sectors and stocks persists. Any shift to more indiscriminate selling would signal a more defensive, crisis-style regime.
- Earnings resilience. The ability of companies to meet earnings expectations could support broader investor participation and help stabilise confidence, even if volatility remains elevated.
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only.
