Markets resilient as US bombs Iran

Global markets wobbled this week after the US launched attacks on Iran, despite President Trump declaring an anti-war position early in his presidency. Although there was some negative reaction, particularly a spike in energy costs, markets were relatively sanguine and didn’t price in a full-blown crisis. Indeed, the market reaction so far has arguably been proportionate and relatively muted. Global energy systems are better positioned today due to the diversification efforts undertaken in recent years after the energy price spike following Russia’s invasion of Ukraine. Markets also appear less inclined to extrapolate worst‑case scenarios.

Yields on government bonds have risen as markets reassess the interest‑rate outlook. Markets had expected the next move in interest rates in major Western economies to be down. Now, given the prospect of an energy‑driven inflation spike, there is a risk that some central banks could raise rates instead. Despite these pressures, oil prices remain well below historical highs in real terms. Markets are behaving in line with previous geopolitical shocks: a sharp initial reaction followed by stabilisation as investors assess how long the crisis might last.

Economic data was also supportive of the optimistic tone taken by markets. A US soft economy landing narrative could clearly be seen in the Federal Reserve’s US Beige Book and purchasing managers index (PMI) data from around the world. Global activity is still expanding and, while momentum varies region by region, the overall backdrop is more stable than the headlines might suggest.

The FTSE 100 was down 4.6% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading -4.5% lower.

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Middle East tensions flare, but markets show resilience

This week saw a sharp escalation in the Middle East after coordinated US‑Israeli strikes on Iran triggered a wave of retaliation across the region. The initial attacks, carried out at the end of February, targeted senior Iranian leadership, which included the assassination of the country’s supreme leader Ali Khamenei, as well as strikes on military and nuclear sites. Iran responded with missile and drone barrages directed at US bases, Israel, UK bases in Cyprus and several Gulf states, prompting temporary disruption at key transport hubs in the United Arab Emirates and Qatar.

The most immediate economic consequence has been at sea. Iran declared the Strait of Hormuz effectively closed, halting much of the tanker traffic through the channel that carries around one‑fifth of global oil flows. Shipping activity dropped by more than 80% as vessels diverted or paused movements amid uncertainty. This chokepoint is the world’s most strategically important energy corridor, and markets reacted as expected: Brent crude initially surged as much as 13%, briefly touching a 14‑month high.

Despite these dramatic headlines, the market response has been more measured than many feared. Oil prices, while higher, remain far below previous crisis peaks in real terms, and the scale of the move so far is modest compared with historic energy shocks. Equity markets mirrored this pattern of early anxiety followed by stabilisation. After an initial sell‑off, US indices recovered, with the S&P 500 and Nasdaq closing flat to slightly higher earlier in the week as investors weighed the likelihood of a prolonged conflict.

Sector performance has been highly uneven. Energy and defence stocks rallied on expectations of stronger demand and heightened geopolitical risk, while airlines, travel companies and logistics groups came under pressure as air routes and freight movements faced disruption.  Bond markets also shifted, with government yields rising as traders reassessed the path for interest rates considering potential inflationary pressures linked to higher oil prices. 

For investors, the key point is that financial markets have behaved in line with previous geopolitical shocks: a sharp initial adjustment followed by signs of stabilisation as the situation becomes clearer. The global energy system is more diversified than it was even a few years ago, strategic reserves remain well‑stocked, and many economies – including the US – have stronger domestic production buffers than during past crises. 

While the conflict remains fluid, the economic spillovers so far are manageable. Market volatility is likely to continue, but it has been concentrated in specific sectors rather than spreading indiscriminately across global markets. Policymakers and energy producers are already taking steps to stabilise supply routes, and any short‑term price spikes could ease if shipping conditions normalise or alternative routes are utilised.

President Trump said in an interview on Thursday that he needed to be personally involved in selecting Iran's next leader - just as he was in Venezuela. Why it matters: Trump acknowledged that Mojtaba Khamenei, son of assassinated supreme leader Ali Khamenei, is the most likely successor - while making clear he finds that outcome unacceptable. A hardline cleric with deep ties to the Islamic Revolutionary Guard Corps, Mr Khamenei has never held public office.

In other words: the geopolitical backdrop is tense, but the economic foundations remain intact. Long‑term investors should take reassurance from the fact that diversified portfolios have historically absorbed similar shocks with resilience – and early signals this week suggest that the usual pattern of reactions may again be holding.

Economics 

Chancellor Rachel Reeves used this week’s Spring Statement to deliver a steady‑as‑she‑goes update on the state of the UK economy, emphasising stability, fiscal discipline and resilience at a time of heightened geopolitical risk. The event contained no new tax or spending measures, with Ms Reeves reaffirming her commitment to having only one major fiscal event each year. 

The most notable development came from the Office for Budget Responsibility, which downgraded GDP growth for 2026 to 1.1%, down from its previous 1.4% forecast. The OBR cited weaker data at the end of 2025, a cooling labour market and subdued business sentiment. At the same time, forecasts showed inflation easing to 2.3%, borrowing falling faster than expected, and living standards expected to improve over the forecast period. 

Chancellor Reeves insisted the government has the “right economic plan”, arguing that falling inflation, lower borrowing and stable public finances reflect a rebuilding of economic credibility. She portrayed the Spring Statement as an exercise in reassurance, stressing that stability is the precondition for growth and reiterating the government’s focus on long‑term investment in infrastructure and productivity. 

However, the OBR warned that the escalating conflict in the Middle East could significantly affect global and UK energy markets, raising the risk of higher inflation later this year. Ms Reeves will meet North Sea energy leaders to discuss the impact of surging oil and gas prices, underlining the external pressures shaping the UK’s economic outlook. What does the Spring Statement mean for your finances?

The latest batch of S&P Global PMI releases over the past week painted a picture of a world economy still expanding, but with growth shifting across regions. While some economies are gaining momentum, others remain stuck in contraction territory.

The latest US Manufacturing PMI for February came in at 51.6, down from 53.4 in January but still marking the seventh straight month of expansion. The report highlights that new orders continued to rise, though at a slower pace, with weaker export demand as firms faced high prices, tariffs and weather‑related disruption. Employment growth also softened as companies pared back hiring. Meanwhile, the S&P Global US Services PMI for February printed at 51.7, slightly below forecasts and down from January’s 52.7, signalling continued but modest expansion in the services sector. So, the data showed the US economy remains on an expansion footing, even if the pace has eased. Domestic demand is proving resilient, helping buffer the drag from weaker exports. For markets, this supports the view that the US slowdown is gradual rather than abrupt, an important reassurance amid global uncertainty.

Here in the UK, the latest Composite PMI for February came in at 53.7, slightly below both expectations and the previous month’s reading of 53.9. That moderation reflects a cooling in services activity and new business growth, though the data still points to continued expansion. The UK’s PMI performance places it among the better‑performing developed economies, with growth continuing despite higher borrowing costs and subdued consumer sentiment. The UK private‑sector economy is growing, albeit modestly, which reinforces the narrative of a shallow, stabilising recovery rather than a downturn. For sterling‑based investors, this reduces the risk of a policy shock from the Bank of England and provides a steadier macro backdrop for corporate earnings.

Elsewhere in PMIs the Philippines is one of the standout performers. Its manufacturing PMI jumped to 54.6 in February, the highest reading in more than eight years, signalling robust growth driven by a surge in new orders and accelerated production. Germany’s services PMI strengthened to 53.5, contributing to an improving composite reading. This places Germany comfortably in expansion territory and highlights a continuing services‑led rebound across Europe. France continues to lag its neighbours. Its latest services PMI stands at 49.6, and the composite at 49.9, both below the 50 threshold that separates growth from contraction. This makes France the clearest underperformer among major European economies this week. 

For investors, the message is broadly reassuring. Manufacturing powerhouses such as the US remain in expansion, outperformers such as the Philippines are strengthening, and Europe’s largest economy, Germany, is gaining traction through services. The pockets of weakness – notably France – are important to watch, but they do not define the global picture. Instead, this week’s PMI releases highlight a world economy navigating uncertainty with modest but resilient growth.

The Federal Reserve’s latest Beige Book, compiled from business and community contacts across the 12 Fed districts up to 23 February, paints a picture of an economy that is growing, but only slowly and unevenly. Seven districts reported slight to moderate growth, while five saw either flat or declining activity – a deterioration from the previous reporting period. Consumer spending edged higher overall, but several districts noted declines driven by economic uncertainty, price‑sensitive customers and lower‑income households cutting back. Winter storms and local factors – including immigration‑enforcement disruptions in cities – were also cited. 

Auto sales were generally weaker due to affordability issues, but manufacturing activity improved, with eight districts reporting growth and rising new orders. Demand from data centres and energy infrastructure was highlighted as a bright spot. Financial services activity was stable to slightly higher, driven by stronger commercial lending. Residential real‑estate activity softened slightly, while non‑residential construction was mixed but marginally higher. 

US Employment was largely unchanged, with seven districts reporting flat hiring. Businesses cited softer demand and rising non‑labour input costs as reasons for pulling back. Several districts highlighted firms turning to automation and AI – not to replace workers, but to raise productivity. Wages rose modestly to moderately, with health‑insurance premiums a key cost. 

Non‑labour input costs – especially energy, utilities and metals – rose moderately, and many districts said tariffs were adding inflationary pressure. Price growth overall remained modest, though firms expect similar rises in the months ahead. 

Despite the patchiness, most districts expect slight to moderate growth in the coming months. Contacts in several districts said their outlook had improved as uncertainty eased compared with late 2025.

Earnings reports

Smith & Nephew posted a robust fourth‑quarter performance, with revenue up 8.3% to $1.70bn on a reported basis (6.2% underlying) as newer products and broad‑based demand drove momentum across all business units. Operating profit for the full year rose 20.7% to $794m, while trading profit margins improved to 19.7% thanks to productivity gains and the completion of its three‑year 12‑Point Plan, which restored growth in Orthopaedics and accelerated Sports Medicine and Wound Management. The strong finish helped the group meet or exceed all its 2025 targets and set the stage for its new RISE strategy, aimed at boosting innovation, scaling investment and delivering faster growth and returns in 2026. 

Bunzl delivered a steady set of full‑year results, with revenue edging up 3% at constant exchange rates to £11.85bn, largely driven by acquisitions. Margins slipped amid tougher trading conditions. The group highlighted improving trends in the second half, including stabilising performance in North America and margin expansion in the UK and Ireland, while maintaining strong cash generation, completing a £200m share buyback and announcing eight acquisitions during the year. Despite ongoing economic and geopolitical uncertainty, Bunzl reiterated its 2026 guidance, signalling confidence in moderate revenue growth and a more stable profit outlook. 

Kier delivered an upbeat set of interim results, with revenue up 2.6% to just over £2bn and adjusted operating profit rising 6.6% to £71m, helped by strong momentum in its Infrastructure Services division and tighter operational discipline. Most notably, the group achieved an average net cash position for the first time in 13 years, ending the period with £16.8m net cash – a milestone that underlined the success of its financial turnaround. The order book climbed 5% to a record £11.6bn, securing 94% of forecast revenue for 2026 and giving Kier unusually strong multi‑year visibility. 

Broadcom delivered a powerhouse fourth quarter, posting record revenue of $18.0bn, up 28% year‑on‑year, fuelled by a remarkable 74% surge in AI‑chip sales as demand for custom accelerators and Ethernet AI switches continued to soar. Net income almost doubled to $8.5bn, and it generated a striking 68% margin. Broadcom also lifted its dividend by 10%, signalling confidence as it guided for another 28% revenue jump in the current quarter to $19.1bn, driven by expectations that AI‑chip revenue will double again to $8.2bn. The results reinforced Broadcom’s status as one of the biggest winners of the AI boom, with Chief Executive Hock Tan highlighting continued momentum across custom AI silicon and networking hardware.

Galliford Try delivered a strong trading update for the first half, with performance ahead of last year and beating management expectations. The construction group said it now expects full‑year revenue to land towards the upper end of market forecasts and adjusted pre‑tax profit to come in slightly above the top end of projections, supported by its position on major long‑term UK infrastructure frameworks and progress across enlarged water programmes. 

Vistry said it delivered stronger second half and full‑year profit growth, despite continuing weakness in the private housing market, as improved margins offset softer volumes. The housebuilder expects adjusted profit before tax of about £270m for 2025, broadly in line with market expectations, even as revenues were flat at roughly £4.2bn and completions fell 9% to around 15,700 homes. The group pointed to better site mix, cost control and increased affordable housing activity, with operating margins rising sharply in the second half to produce a full‑year margin of 8.4%. Vistry also highlighted falling net debt and fresh funding support from Homes England, saying its partnership-led model and land acquisitions in a subdued market position it well for a pick‑up in affordable housing volumes and a more second‑half‑weighted recovery in 2026. 

Weir Group reported a solid third-quarter performance, with total orders up 2% year-on-year, supported by acquisitions of Micromine and Townley, while underlying original equipment orders surged 15% excluding last year’s large contracts. Aftermarket orders grew 10%, reflecting installed-base expansion and software-driven demand. The Glasgow-based engineering company reaffirmed its full-year guidance for constant currency revenue and operating profit growth, targeting an operating margin of around 20% and free cash conversion of 90%–100%. 

Insurer Aviva posted a solid third-quarter update, with general insurance premiums up 12% to £10bn and wealth net flows of £8.3bn, leaving the group on track to hit its 2026 financial goals a year early. Operating profit for 2025 is now expected at £2.2bn, including a £150m boost from Direct Line, while cost synergy ambitions from the deal have been raised to £225m and capital benefits to £500m. The insurer also pledged to resume share buybacks next year and set fresh medium-term goals, including 11% annual EPS growth through 2028 and a return on equity above 20%. But shares fell around 4% as investors judged the new targets underwhelming.

Ibstock said in a trading update that it delivered a resilient performance in 2025 despite a tougher backdrop for UK housebuilding, with revenue rising about 2% to roughly £372m as strong cost control and stable pricing helped offset weaker market conditions in the second half of the year. The brick and building materials group said volumes softened as uncertainty in the housing market weighed on demand, leaving total brick market volumes well below pre‑2022 levels, but its clay market share increased - and earnings remained in line with guidance.

Reckitt Benckiser delivered a stronger‑than‑expected fourth quarter, posting 5.4% like‑for‑like net revenue growth, ahead of consensus. Emerging markets once again did the heavy lifting, with sales up 14.6% thanks to double‑digit gains in China, India and other high‑growth regions. Europe remained a drag, hit by weaker seasonal demand and tougher category conditions, while North America returned to growth with solid performances in non‑seasonal brands. The quarter capped 10 consecutive periods of double‑digit emerging‑market expansion and underscored the group’s shift toward higher‑margin, faster‑growing categories, supported by the completion of its $4.8bn Essential Home divestment

Rentokil delivered a stronger‑than‑expected fourth quarter, soothing recent investor nerves as organic revenue growth accelerated to 3.5%, powered by a marked pickup in North America, where growth improved to 3.6% after a sluggish first half. International markets also performed well, rising 3.4%, helping lift full‑year revenues to $6.91bn, up from $6.62bn. Outgoing chief executive Andy Ransom said the second‑half recovery reflected strategic changes made early in the year, leaving the group “well‑placed” to capitalise on industry growth, and management reiterated confidence that 2026 results will meet market expectations, despite some weather‑related disruption in January. 

Taylor Wimpey closed out the year with a broadly steady fourth‑quarter performance, maintaining a net private reservation rate of 0.75 homes per outlet per week, matching 2024 levels despite a cooler housing market. The update highlighted robust underlying demand, supported by improved planning progress and a growing outlet pipeline, even as management warned of margin pressure in 2026 from softer bulk pricing and rising build costs. Analysts trimmed price targets on concerns over profitability, but the company’s strong sales engine, disciplined land strategy and expanding planning approvals offer a degree of resilience heading into the new year.