Hello, everyone, and thank you for joining our Second Quarter 2026 Global Market Perspectives webcast. My name is Mandy Wilson. I lead Principal's US and Canadian institutional business and our Global Consultant Relations team. And I am pleased to be your host today. And today, I'm joined by today's speaker, Seema Shaw, our chief global strategist.

As you've experienced, the second quarter of 2026 is bringing periods of volatility, some highly reactive markets. And Seema is here today to cut through that noise and help us understand some key drivers shaping investment decisions to help you prepare your portfolios for the period ahead.

And as a reminder, if you've got questions during Seema's comments, you can submit them any time in the Q&A window on your screen, and we will aim to address as many of them as we can after we conclude the formal remarks. So let's go ahead and get things started. Seema, turning it over to you.

Thank you Mandy. Thanks, everyone, for joining. Well, what a quarter. This has been a tough one, I think, for everyone to be navigating. You can see the title there, hoping for the best but being ready for the worst. This has been, as I said, a challenging quarter, not just because of the Iran conflict. It's also because of all the worries around AI. We had the worries about private credit. There were a ton of other geopolitical moves that have created a lot of volatility.

And yet if you're looking at the market right now, if you look at it today, things actually look OK. So I'm going to talk through a lot of the turbulence and factors that have been playing out and shaping the backdrop, with at least some expectations for what could be playing out over the next couple of quarters.

I just want to reiterate, though, for-- I think everyone will understand this. There is so much uncertainty right now, but as we're talking through the outlook, I think I've never seen as much use of scenarios as I am today. So I'll be talking through all of that as we go through. Let's go to the agenda. Go to the next slide.

I've talked about the various risks. The US economy, though, it's generally been fine, but there are risks. And generally, that's going to come through consumers because of the rise in oil prices and the impact to energy bills and other factors for expenditure.

When we're thinking about the Federal Reserve and other central banks around the world, there has been a major repricing of central bank expectations, a lot of expectations that there's going to be hikes this year, which is a very significant turnaround from the start of the year. But specifically for the Fed, we're actually expecting rate cuts to be delayed for not derailed, so that's really key.

The Fed is one of the few major central banks that we're still expecting rate cuts in 2026.

For the equity market, this has been, of course, a challenging quarter. A lot of volatility. But we do think that there is some optimism out there that we should be looking to. For fixed income, similar to equities, actually, spreads have stayed relatively tight. There's been some widening. And I think the resilience of the US economy and the global economy that was already in play at the start of the year, although it's being tested, it has continued to stand through. And that is helping contain some of the actual pass-through from the geopolitical shock through to the economy and then to the market.

And for investors, as I go through all of this, talking through equities and fixed income, I think the general message should be one of focusing on resilience, making sure your portfolio is diversified because the headlines are whipsawing us, and we're trying to look through the noise, but taking into account that there's a number of different scenarios that could be playing out over the next couple of months.

Let me get going with talking through the global economy. I've already talked a number of times about the various shocks that we've seen so far this year, the private credit, AI displacement concerns, and then, of course, the latest one being, I think, the most significant, which is the US-Iran conflict.

We've already seen oil prices spike. We saw them hitting some levels for Brent at about $120 a barrel. Right now-- I think I've just checked-- it's just under $100. So this is still very, very significant. And this has been the largest energy supply shock almost in history. What's been interesting, though, is that investors through time have been conditioned to look beyond geopolitical crises.

Typically it doesn't have a sustained market impact. It doesn't really transmit to the broader economy. The exception to that rule, though, throughout history, is when it's an oil price shock, because there's a quick transmission in terms of prices directly to consumers, to corporates, and then that can feed through to the market. But this is still really early days. If you go back just a few weeks when we saw oil prices at $120, before the ceasefire was announced, they have come back down again, a lot.

It is worth emphasizing, though, that although oil prices have come down, they're still very close to $100 a barrel. That is almost 50%-- it is actually 50% higher than at the start of the year. And from our perspective, as we're looking through the geopolitics, the various conflicts, the various dynamics, we're not anticipating that oil prices are gonna return to pre-conflict levels this year.

So when we take that into account, yes, the market has dealt with this very, very well. And as you can see from the chart on your left there, there haven't been very significant downgrade to growth in the US or even in Europe. But there is likely to be some impact feeding through to the global economy.

Now there's gonna be differences. There's been divergence in the way that the different economies are gonna be responding. For the US, it's a net energy importer, so it is less exposed. So there's been a very small downgrade growth. For Europe, it's an energy importer, so it is more exposed.

But it's also worth keeping in mind that compared to 2022, Europe has diversified its energy supply chain. So it's not as exposed as it was. And when you look at China, you can see, actually, the forecast for China has not even moved at all. It hasn't budged. And that is despite the fact that China has been very dependent on Middle East energy.

And the reason is that China also has a huge amount of stockpiles. It has a focus on renewables, and it has this amazing ability to pivot to coal. So actually, there has been very little impact. The exposure that China has to the conflict is really through what happens to the broader global economy.

Now the situation is still very, very fluid. We simply don't how this is exactly going to evolve. In the worst-case scenario, it's worth saying that if the street were to remain shut, if the ceasefire is called off again, but actually stays off and the street remains [AUDIO OUT] oil prices would, in that scenario, increase. And in that scenario, then global downgrades should be expected. And the chart on your left there would look quite different. But that is the worst-case scenario. It's not something that we're putting a huge amount of probability weight into.

Let's go to the next slide, in terms of focusing on US macro strengths. Now last year, the US economy grew by 2.1%. That is in line with the long run average. And if you take your mind back, I mean, we're focusing on all the risks that are happening right now. But if you remember last year, there was also a lot going on. Around this time of the year, we were worried about tariffs, and yet still, the US economy managed to pull through, and it grew in line with its long run average.

Now coming into 2026, I think the data is actually a little bit more constructive than many people had been anticipating. And we saw that across retail sales, industrial production, et cetera-- and the chart on your left is showing you some of the hard data versus the soft data. Now remember, hard data is activity data. Soft data is stuff like surveys and confidence.

Now, generally speaking, the data continues to be quite robust. In the last few weeks, we have seen some softening coming through, and that's probably before the actual oil price increase impact feeds through. So there has been some softening in the economy. But generally, if you're taking a big step back, the picture that we're seeing is still one of robustness, softening but still one of robustness.

The two key things which are not quite in line is labor market and consumer confidence. Those two are the things that have let the economy down in a way. Consumer confidence, in some measures, are at record lows. And the labor market is just giving a very, very unclear signal. I'm gonna talk a little bit more about that.

From a consumer confidence perspective, what we think is that this is reflecting continued affordability stories, which are becoming worse because of the inflation impact, because of the low hiring rate, and of course, because of the continued policy uncertainty.

Now at the start of the year, we had seen that financial conditions had been easing. And that's the chart on your right. So as the line goes up, that means the conditions are easing. The reason for that very constructive backdrop for markets, for the economy, is because there were expectations for Fed cuts, those expectations for fiscal stimulus coming through the One Big, Beautiful Bill and generally, equity markets looking really, really strong. And that was all contributing.

Now as you can see on the chart on your right there, that the conflict has triggered a very, very sharp tightening in financial conditions. And inevitably, that will likely weigh on growth. But it's also worth saying that financial conditions are meaningfully less tight than during the Liberation Day turmoil of last year.

And since the two-week ceasefire was announced, kind of gone back and forth and that, but financial conditions have loosened since then very, very considerably. It doesn't quite show up on the chart right here because it's been a pretty big spike, but financial conditions have loosened up a little bit.

It's worth just saying here that when we're doing this scenario testing and thinking about what the impact to economic growth could be, the model suggests that a 10% increase in oil prices could subtract US growth by about 0.1%, so every 10% increase in oil prices subtracts 0.1% growth. In a medium scenario, in a medium-risk scenario, where oil prices settle at around $85 to $90 a barrel, the impact of US growth is still quite subtle. Of course, it gets worse if oil prices move higher and if it's really sustained at that level.

But overall, this is not a terrible picture. So this is still some macro resilience. Let's go to the next slide. If you've joined the call before, you've heard me talk about the desert, that last year, it was about the vegetables, getting through the tariffs, and that this year will be where you start to see the benefits of that, with the desert coming through from the fiscal stimulus, from deregulation.

Now the oil price shock, it's worth saying, is primarily an inflation shock. So it's first an inflation shock, which then hits the consumers and then becomes a growth shock. Now coming into 2026, one of the reasons that there was expectations for consumer strength was because of the One Big, Beautiful Bill. And the fiscal stimulus that was expected to hit consumer spending, give it a nice boost through Q1 and Q2.

As you can see from the chart on your left, from our expectation, from our estimations, we believe that the tax refunds or the increase in tax refunds for your average tax filer would be an additional $750. So that's $750 above what was seen last year. Now we're in the middle of seeing that play out. And it's true that tax refunds are running at a higher pace than last year.

This is a really important thing because it gives a really nice boost to hassles just exactly when they need them. Because as you can see from the right-hand side of that chart in the black bars, if we were to see all prices settle at around $90 a barrel, that would cost your average household about $770 this year, and that offsets a One Big, Beautiful Bill. You can also see it as the One Big, Beautiful Bill almost compensates you for the extra expenditure for households.

If, of course, oil prices jump up to $125 a barrel, then, actually, the cost to households is considerably higher, and the One Big, Beautiful Bill isn't enough to offset that. But it is a very, very helpful offset right now.

From a distribution perspective, maybe the impact isn't as great. You can see from the chart on your left there that the benefits are skewed very much to higher income households. Lower income households, so your first, second quartile, they're not really getting that much of an increase in tax refunds this year.

Keep in mind, too, that lower income households are more exposed to higher energy prices. So from our estimates, for the lower 40% of household incomes, you only need oil prices to settle at about $75 a barrel. Remember, right now, it's at $97. So if oil prices were to sell at $75 a barrel, that would fully offset the OBPA benefits for lower income households.

So at the moment, the lower income households are really not feeling the full impact. And simply, the fiscal stimulus is not enough to help them through this energy price crisis. It's also worth keeping in mind that this is something which is a bit of a sugar spike.

The OBPA, for households, it just works in March, April. This is not something which is gonna be sustained through the year. So come May, well, then households are pretty much on their own, because fiscal stimulus is no longer giving them a boost.

The chart on your right there, it's about what the One Big, Beautiful Bill, coupled with the deregulation measures that are coming through, is gonna do for corporates. We're estimating that your average effective corporate tax rate in the US is going to come down from 21% to 15%. This is a really important boost for companies.

And if they were to use those savings to reinvest into their businesses, so that CapEx, what that could do is that they extend the impact, the positive impact of the One Big, Beautiful Bill through all of 2026 and even into 2027. And of course, rising energy costs with the impact to margins that could offset some of the tailwinds. But either way you look at it, the One Big, Beautiful Bill, it is a very, very helpful support mechanism coming in at just the right time, when households and corporates probably do really need it.

Let's go to the next slide. Now I usually talk about the strong US foundations that talk about the balance sheets. And I always talk about it as a way of saying, well, look, this is the resilience of the US economy. This is a cushion. This is when, right now, it really comes into play. And you can see it in practice.

So the chart on your left there is showing you household net worth. The household balance sheet strength in the US has been improving continuously, almost, for the last couple of decades. In a number of different measures that we look at, households are the strongest that they've been since the early 1970s. What this means is, especially when you have net worth increasing so much, it does mean that households can absorb energy shocks.

In terms of numbers, the ave-- sorry not average. Overall, household net worth in the US has increased by about $70 trillion since COVID. The top 20% of households, however, account for 80% of that increase. So this is, again, very, very much skewed to higher income households. So that is a very significant disparity.

So the top 20% could be found at the bottom. 80%, they have significantly less cushion. One key vulnerability to keep in mind, though, is that whilst the top 20% are doing well and they probably can continue to carry the US economy because they account for about 50% of consumer spending, they themselves have a vulnerability, which is that they have been very exposed to equity markets.

The main reason that you've seen this increase in net worth over the last couple of years is because of those 20% higher income households, they hold about 87% of direct and indirect corporate equity holdings. They have an enormous exposure to equity markets, and that's what's been driving up their household net worth. So you can imagine that if there were to be a significant pullback in markets, well, that would weigh on the 20% on those top 20% of households. And that could deliver a direct hit to consumer spending.

It's worth also saying, though, that if you look at the chart on your right, given that the corporate margins are sitting at record highs, we've got liquidity, which is ample leverage, is quite contained. The risk of a major sustained market pullback is quite limited because of strong corporate balance sheets. But this is a vulnerability that I think is worth everyone keeping in mind. There is a very-- what's the word? A very disparate US economy in terms of household wealth. It's fine at the moment because the top 20% can carry the rest of the economy, but they have a vulnerability in terms of equity markets.

All right, let's go to the next slide and talk about labor markets. To me, this is the most crucial and fragile part of the US backdrop. We can be quite hopeful and quite optimistic about the strength of the US economy, provided everyone has a job. That's fairly obvious.

Now what we've been seeing in the numbers, if you look at the chart on your left there, is that nonfarm payrolls, which show you the amount of job creation from a month-to-month basis has been all over the place. If you look at just the last couple of months, one month is up, one month it's down. If you look at the three-month moving average, at the moment, it's sitting at about $75,000. So that's what we should be focusing on, rather than the month-to-month, given the volatility.

So if we think about that, on average, 75,000 new jobs have been created each month. Now from our estimates, that is consistent with a break-even pace for the US economy. And the reason is that there's been such a decline in immigration with this tight immigration stance from the new administration, given demographics with a higher retirement rate coming through the economy, that you don't need to create as many jobs as you used to, just to keep unemployment rates stable.

So once upon a time, about five or six years ago, you would need to create about 150,000 jobs in order to keep the unemployment rate stable. Today, given the drop in labor supply, you only need to create somewhere between 35 to 75 jobs, depending on what you believe is actually happening with immigration.

The other thing, though, is that there is another secular driver in play for the labor market, which is becoming quite difficult to decipher, but it's something that we're all watching very closely, and that is AI displacement. So what exactly is happening? Is AI already starting to lead to job losses?

Well, the fact that we're seeing is that we're not seeing a great number of job cuts through the economy. Jobless claims have stayed very, very low. Job cuts are staying very low. And of course, the unemployment rate is sitting at about 4.3% level. So there's no real evidence that AI is resulting in mass job cuts. But we do that entry-level workers are currently struggling to find jobs. Some estimates are suggesting that over the next year or so, we could see a portion of the labor force start to lose their jobs.

Now the chart on your right there is an interesting one, because the job creation, net job openings, have been following the S&P 500 earnings very, very closely. And in the last couple of years, it has completely diverged. So S&P 500 earnings companies are still being able to perform well, yet they're not creating as many jobs. So what does that tell us?

It tells us that, fine, AI may not be resulting in job losses, but it does mean that additional productivity that companies have means that they don't need to continue hiring as much as they used to. So there is some kind of impact coming through with the Fed. And of course, all investors are gonna have to really keep a close eye on it.

We're saying, as well, that provided profitability remains strong. That's the key thing. Then job losses really should be unlikely at this stage, as long as AI doesn't suddenly run away from us and become that massive event that people have been fearing.

OK, let's go to slide 7. So we've talked about unemployment. And of course, the Fed has to be really focused on the labor market. There are some signs of softening, but it's not very, very clear. The other part of the story that they need to focus on is inflation.

Now inflation, it continues to be a challenge. It has been coming down from the peaks, of course, during COVID. That's a chart on your left there. But it hasn't come down enough. It hasn't come back down to the 2% level. And in fact, headline inflation in the US has been above 2%, the Fed's target, for five years now.

And on top of that, we're now confronting not only the tariff-driven shock from last year, we're also confronting the potential for an increase in inflation from oil prices. Now, the chart on your left there is showing you the composition of inflation. The bars will pick up stuff like the core goods inflation. That's probably where you see tariff inflation coming through, The core services captures the strength of the labor market, and then, of course, there's energy and food which is where you would see any increase from oil prices feed through to inflation.

Now the latest CPI print, which came out last week, 3.3%, that's at a two-year high. That is almost entirely driven by the oil price increase. Now you can see there's some dotted lines at the right-hand side of that chart, That shows you the couple of different scenarios that we have, depending on what happens to oil prices. That very scary line, the light blue one which surges in the next couple of months, that is if oil prices were to rise to $125 a barrel, maybe beyond, and stay there for a really long period.

Then you could see inflation coming up to about a 5% or 6% level. That is not our central scenario. What is more likely, though, is that if you see oil prices hovering at around $90 a barrel, well, then you could see inflation sitting at around a 3.5% to 4% level on the headline level.

That is quite frightening. For the Fed, it's even more worrying, because I've shown the chart on your right a couple of times over the years. We've been watching this really closely. So current inflation has been tracking historic inflation through the '90s and '70s, so 1970s and '80s very, very closely.

Whenever I've shown this chart in previous years, I've said, well, at the same time, this was driven by two oil price shocks. So that second surge and then in the early '80s was driven by another energy price impact. Unfortunately, of course, today, that is something that we are confronting.

So from the Fed's perspective, given that it is tracking that so closely, how can they sit back and just say, well, look, the labor market is loosening, we can just go ahead and cut rates? They can't do that. They need to have clear evidence that current inflation is not gonna follow that historic inflation line much, much higher.

Now, from our perspective, as I said, we do think inflation is gonna move higher. We think it could go to a 3.5%, 4% level on a headline inflation perspective. We're not expecting it to go significantly higher than that. We do think that at some point in the next couple of months, once a tariff impact starts to fade out, that the Fed will feel a little bit more confident about the inflation outlook, but they need to have that evidence.

So if we go to the next slide, in terms of what the Fed is actually gonna do in this environment they need to retain inflation caution. They need to watch this very, very closely. We came into this year expecting two 25 basis point rate cuts coming through in the second half of the year. Given the additional inflation caution that the Fed has to adopt in light of the conflict, we think that they're going to wait a little bit longer, until they have complete evidence that inflation is coming down, that inflation expectations have remained anchored.

And because they have that additional focus on labor markets that other central banks don't, they will still be skewed to rate cuts, but they're just going to need a little bit more time to bring them through. So we are now expecting one rate cut in September, potentially in December and then that second rate cut to come through in 2027.

From a market expectations perspective, we are slightly more dovish than what the market is expecting. Actually, there's been huge moves. The chart on your right there is showing how market pricing has been fluctuating since the start of the year. It came into the year like us, expecting two rate cuts a couple of weeks ago. It moved to no cuts and even expecting a hike. But now it's come back down again a little bit. So we are expecting one cut for this year.

OK, let's Move away from the US, go to the next slide, and talk a little bit about the global macro backdrop. Now coming into this year, similar to the US, the picture was looking very, very strong. We had seen European growth momentum picking up. You can see that from the chart on your left there, that composite PMIs for the European region actually moved above 50 for the first time in ages, so really suggesting expansion. We knew that fiscal stimulus is going to come through primarily from Germany, but from a number of different countries in Europe. And there was real optimism about what Europe could deliver.

When you looked at Asia as well, more positivity there, focusing on tech innovation, the fact that the US dollar had been weakening, providing an additional boost for a lot of the EM countries, and a number of central banks still primed to cut rates.

Now, then, we bring in the conflict, and unfortunately, it has threatened to undo a lot of that very constructive activity that had been going on. I've already mentioned a little bit already, but for Europe, we are starting to already see some economic deterioration come through for some of the PMIs. Global confidence is down. There are supply chain issues.

How worried should we be? Well, look, if this ceasefire were to continue to be sustained, things start to improve and oil prices come down again, well, then we do think that there is enough fundamental robustness within the European economy that it can pick up again.

For broader Asia, actually the picture-- even though they are more exposed to the Middle East, there is more dependency on Middle East for energy, if the ceasefire were to be maintained, actually, those countries could really bounce back. And we think there is a lot of good potential there for growth.

The immediate risk at the moment, though, is about the physical availability of commodities. When we're looking across the Asian countries, Taiwan is probably the most vulnerable in terms of the physical availability of commodities. Japan and Korea have more cushion with their stockpiles.

China is a completely different story, in a way, because as you can see from the chart on your right, there has been so much focus on export strength. What we've seen is that because China's economy, although it has been dependent on Middle Eastern energy, it has significant stockpiles focused on renewables, the ability to shift to coal, that actually, they haven't been that exposed.

So the focus for China, whatever happens in the conflict, is still what's going on domestically. So are they able to continue with export growth, even as domestic demand is weakening? We feel pretty positive that China can reach the 4% to 4.5% target that they are hoping for this year. So actually, our China forecasts are very much unmoved for 2026, despite the conflict.

The other thing to mention is what's happened with the central bank pricing, globally. I've already talked about the Fed, but this has been quite different for global central banks.

So if we go to the next slide, coming into this year, there was some expectation that there would be rate cuts, of course, for the Fed, but also for the Bank of England. There was expectation that the ECB would not have any rate cuts at all this year, but generally, it was a dovish path for most central banks around the world.

Now on the chart on your left, I'm just going to take a moment to explain what's happening there. Now the horizontal lines are lines are where policy rates are today. The lighter blue bar is where markets were expecting policy rates to be coming into this year, what they were expecting policy rates to be at the end of the year, so how many cuts or hikes were priced in. And the darker blue bars are what the market was pricing at the end of the quarter.

So as you can see, for the Fed, the market is still pricing in just one cut. Same as us. For the ECB, the market had gone from pricing in almost no cuts for this year. It's now pricing two or three hikes. Our own expectation is that we could see one or two hikes, probably not three. That seems a little bit aggressive.

For the Bank of England, there's been a major, major turnaround, where the market was expecting three cuts for this year. And it even has shifted at one point to expecting four hikes.

So from here, what our expectation is that whilst the Fed is going to be cutting, we do think that European central banks, given their focus solely on price stability, is that they will have to hike rates this year. We don't think it'll be very aggressive, but a tightening path is likely for a lot of the European central banks.

For the dollar, it's going to have an interesting impact. If you think back to last year, we had seen some dollar weakness coming through, as there were concerns about policy credibility, because we were expecting the Fed to be cutting rates a little bit more than most other central banks. And yet, since the conflict, as you can see from the chart there, actually, the dollar has rallied a little bit. So the US has been a bit of a safe haven. And you've seen these dollar inflows.

I would say that if the conflict comes to an end, whenever it does, we would expect that dollar weakness trend will reassert itself. There will be continued concerns about the certainty of US policy. We'll be looking at the central bank divergence with the Fed expected to cut and other Western European central banks expected to hike. And that should put renewed downward pressure on the dollar going forward.

So before I turn to markets, just to summarize what's going on in the global economy, we spent this year fairly constructive. We think the foundations are still in play. Particularly when we look at the US, there is still resilience. We think that they can withstand a lot of the shock that is coming through from energy prices, but there is a divergence there in terms of the US being probably the least vulnerable, Europe being quite vulnerable, and Asia also being very vulnerable. But hopefully, with the ceasefire coming through, we should get back to a path of global growth in the coming months.

OK, let's go to the next slide. I'm going to talk about equities next. And let's go to the next-- perfect. All right.

Actually, before I go into this, let me just take a moment to talk about oil prices and geopolitical shocks, because this has been a really interesting development.

Now historically, geopolitical shocks don't have a very sustained impact on the market. Historically, a geopolitical shock takes about three weeks. It lasts for three weeks, in terms of the market coming down to its floor. It takes another three weeks to recover. In total, the S&P 500 declines about 7%.

Now if you compare that to the conflict today, where we are, the S&P 500 is six weeks since the start of the conflict. The S&P 500 is essentially recovered. And at its worst point, the S&P 500 was down 7.7% So despite this conflict feeling far worse than anything that we've seen in recent years, this has actually followed the historical playbook almost exactly.

So where do we go from here? Well, truthfully, this is unlikely to be the end of the story. This is unlikely to be a case where this is the end of the conflict, where you go back to life as it was, where you have oil prices around a $60 barrel point. We are anticipating that oil prices will stay a little bit elevated.

If that is correct, then there is some earnings downgrade which is likely to come through. There will be some growth downgrade to come through, just as I was talking about it in the macro backdrop. We're not expecting it to be very significant. It's quite mild, but it does mean that there is some vulnerability for markets coming forward.

So how do we play it through? Well, if we start at the chart on your left there, the key thing to be watching is earnings growth. Now, the market this year so far has been very resilient, despite not just the conflict, but also the concerns about private credit, the concerns about AI displacement. What we had seen at the beginning of the year, as well, is that because of the constructive growth outlook, not just for the US but for the globe, there had been a broadening out of performance away from US tech to other parts of the market in the US, and also to international markets.

So the chart on your right there just shows you that, actually, other parts of the market, small cap, other sectors and international, were actually outperforming the US. So it all came to a halt as the start of the conflict came through. Since the conflict has started, because the US economy is expected to be the least vulnerable of any, the US has become a little bit of a safe haven. And we've seen a bit of a pickup in the S&P 500 compared to the rest of the market. Where do we go from here? Unfortunately, it does depend completely on how the ceasefire goes. We are expecting oil prices, as I said, to hover around the $35 a barrel mark.

Sorry, I think I've lost connection. Hopefully, I'm back again. I think I'm back again. Sorry. So sorry about that. I think I lost connection, but I'm back again. If the ceasefire hold and the economic shock slowly fades, then that broadening out that was in play earlier in the year should reassert itself. Keep in mind that post-conflict, market concerns about AI is likely to return, same for private credit. So even if the conflict ends, we're not anticipating returns to be very, very strong for this year. That was already anticipated at the beginning of the year. But so much of this does depend on how the conflict evolves.

Importantly, because we still expect the Fed to cut rates this year, that is a constructive environment for small caps to outperform if the conflict does-- if the ceasefire is holding. And we would expect to see other sectors have renewed outperformance. When we're thinking about global markets, if the conflict ends, when we would actually expect Asia to outperform? Given it was the most exposed, there is potential for more of a bounce back. When you're thinking about Europe, that was also exposed. It has been exposed.

But because European central banks are set to hike rates, you may not see as strong a performance from European markets as we would do for Asian markets. But overall, I think the key sign that we have here is that because we don't what's happening with the conflict, having some kind of diversification, looking at the US, looking at Europe, looking at Asia, it does make sense. You don't want to put all your eggs in one basket. I want to talk about tech before I go back to the global valuation map that I usually talk about.

So we go to the next slide, at the beginning of this year, pre-conflict, the tech sector, its underlying vulnerabilities did become a key focus. We had continued to see strong growth from it, which you can see from the chart on your right. But real concern sentiment, investor sentiment about debt funded AI related CapEx had raised fears of a bubble-like dynamics. We saw a valuation pullback that slowed Tech's uninterrupted rally.

Now, concerns have deepened in February. As we saw those rapid advances in AI models amplify, phasor AI solutions could displace legacy business models. And that triggered a sharp sell off across tech and service related industries. The good news is that in February, that pullback that we did see did mean that valuations came even further in. So actually, when you're looking at an attractiveness basis, tech with that indiscriminate selling became fairly attractive.

Now, through the conflict, what we've seen, as well, is that investors have been looking for companies, which have got strong balance sheets, good cash flow, strong margins, something which is a little bit macro agnostic in a way to keep them safe through this conflict storm. So actually, tech became a bit of a darling for the market again for a little while. We put out a note a week or so ago that we're not entirely convinced by the sector's broad resilience to geopolitical tensions because of its exposure to the energy supply, which is required for semiconductors. So something to keep in mind.

Now, as we're looking forward over the next couple of months, we're interested in the fact that valuations have become more attractive to tech, for technology. We're interested in the fact that they are slightly more macro agnostic, and given all the indiscriminate selling, there are opportunities. But we would say that AI driven disruption is real. And as AI progresses, there's going to be dispersion between leaders and laggards across both tech and various services. So that dispersion is likely to widen.

So what investors should be doing is don't just look at tech and say, wow, it's much cheaper than it was at the beginning of this year. Let me just plowback in. You want to be really focused on picking out firms with strong business models, which are adaptable, clear pathways, productivity gains through AI adoption, something which they're positioned to benefit from. So this still is an interesting sector, but there is dispersion. And really active management is going to be key for getting continued focus on AI tech.

Let me go to the next slide in terms of the global valuation map. With the backdrop as certain as the one that we've had to this point, I don't need to exaggerate the importance of diversification. Imagine there are two key scenarios out there. One is that the conflict ends, in which case we should see global equities really bounce back. In the other scenario where a conflict actually escalates from here, less likely, but let's say it does escalate from here, well, then we could be back to where we were just a month ago.

From a valuation perspective, then investors should be looking at where are the opportunities around the world, the valuation map there, the boxes are showing you which are the parts of the market which are expensive relative to their own history. Those are the red boxes. The ones which are green, there's not many of them. They're the ones which are relatively cheap compared to their own history. Now, you can see here that small cap in the US is still meaningfully cheaper than large cap, but that does need to have US growth staying fairly strong, and you do need to have the Fed cuts coming through.

So for that, you need the conflict to-- the ceasefire to continue. If you're looking around the rest of the world, where are the opportunities, well, Europe, it does enjoy diversification benefits because it has lower tech exposure than the US. But it is more vulnerable to elevated energy prices. So from our perspective, what we should be doing in Europe is you focus on defense and energy security. Those are the areas which are going to be doing well, despite whatever happens in the conflict.

When you're thinking about Asia, China is still very cheap, and it has very little exposure to the conflict. Again, it's a very specific story. You really need to which of the companies you're investing in. But we are quite hopeful that export strength will continue. And that's where a lot of the opportunity set is. Beyond China, across Asia, there are cheaper valuations. There's tech innovation. There's even fiscal stimulus coming through in a lot of these markets. So you've got cheaper valuations and you've got stronger fundamentals potentially coming through, so there are opportunities there.

And then the cheapest region that is very clear in the map here is LATAM. Importantly, the valuations are cheap, but also the fundamental story is actually quite compelling. You have a richness in critical minerals and metals, which we think is going to be a long-term theme in this very new era of global instability, and as you're seeing demand for resource intensive technologies continue to rise. So there are opportunities around there.

And given the fact that we simply don't what the headlines are going to be on a day to day basis, and there are opportunities globally, well, this is when you want to think about diversification globally, and in the US, not just putting all your eggs into tech, but also thinking about small cap, because that could bounce back really well if this conflict were to continue to wither down. Let's talk about fixed income now.

If we go to the next slide, what we've had here is that at the beginning of the year, interest rates had been trending lower. That was partly because of the expectations of some central bank cuts. But the outbreak of hostilities in the Middle East has really created a perfect storm for bond markets. Global yields, so not just in the US, but globally, they have pushed higher since the end of February. At one point, towards the end of Q1, the US 10-year yield was approaching 4.5%. Now, much of the action, though, has actually been very much concentrated at the short end of the yield curve.

And the very simple reason is because of the repricing for central banks that I was talking about earlier, the fact that markets started to price in a number of central banks from the US across to Europe and other parts of the world, actually moving to hikes this year. And that has put upward pressure on the two-year point. Now, there has been some hawkish pass-through to 10-year yields, but really, there the move has been more modest. And that's partly because growth worries in this energy shock are likely providing some offset putting a bit of downward pressure on the 10-year yield curve.

How did this go from here? From our perspective, when you're looking across to Europe and other parts of the world-- sorry, just Europe, I should say-- we are expecting some hikes to come through. So there is still some movement on that two-year point. But if you're looking at the US, well, we do actually think there's going to be rate cuts coming through. So that actually does look like an interesting part for the fixed income universe.

From a long end side of the discussion point, think about this. Over the next year or two, there will likely have to be increased defense spending. Countries are going to have to really think about increased ammunition in this new world of global instability. So we do think that there could be some further upward pressure on the long end part of the curve. If you're looking across to different central banks and which ones look a little bit safer, for example, the US is looking pretty good.

So the chart on your right there is showing you inflation break evens. And that's going to be that's going to be a key part of that 10-year point, as well as the defense spending. In the US, inflation expectations have not increased as much as they have for Europe, which is exactly what you would expect. And so the 10-year point for the US long end is looking a little bit more attractive. Let's move to the next slide in terms of credit resiliency.

Now, downside shocks have added to headwinds, and it's triggered a bit of a risk off environment in credit, as well as, of course, in equities. Now, the widening credit spreads that you can see from the chart on your left there, it's happened, but it's still fairly contained. If you compare it to the record lows, it's not far off that. And the reason is that earnings backdrop, the constructive macro story that I've been talking about through the private and the call, healthy margins are continuing to underpin credit markets. And that's limiting spread widening.