transcript

Speaker 1:
[00:00] Lots of firms throw a couple flashy funds your way and call it a day, but not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline, it's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com/audio. That's vanguard.com/audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor.

Speaker 2:
[00:27] Please stay tuned for important disclosure information at the conclusion of this episode.

Speaker 3:
[00:38] Welcome to Investing Insights. I'm your host, Ivanna Hampton. What's fueling Wall Street's optimism? While geopolitical tensions between the US and Iran are dominating headlines, US stocks recently hit an all-time high. The global oil shock is just one major disruption to rattle investors before receding this year. The enthusiasm for the artificial intelligence boom also waned in early 2026. So, what should investors make of the market's fluctuating mood? Tom Lauricella is the Global Markets Editor for Morningstar Inc and the editor of Smart Investor Newsletter. Thank you for joining me, Tom.

Speaker 4:
[01:19] Glad to be here.

Speaker 3:
[01:21] Well, the war with Iran is nearing two months, and it remains unclear what the next steps between the US and Iran will be. What have been some of the key takeaways from how the markets responded to the war? And I should note, we are recording this episode on the morning of Wednesday, April 22nd.

Speaker 4:
[01:40] Yeah, it's been a really interesting time. You know, unfortunately, we've had to deal with this war and its impact on people and the economies. You know, the initial reaction was a lot of uncertainty and fear with the Strait of Hormuz being closed and what that was going to mean. We had the immediate oil price shock. And of course, equities sold off really quickly in response to that. We had some other flight to safety moves here in terms of the dollar. But it's been interesting how quickly the market has looked beyond that. Yes, the worst of the shooting seems to have stopped for now. But in terms of the concern that everybody had, it was always from day one, watch the straight. That's going to be key. What's the impact going to be on energy? And here we are two months in and that hasn't changed. That dynamic hasn't changed. Nothing is flowing through the Strait of Hormuz, and yet the markets have been able to weather it. And that's been the really interesting aspect of this.

Speaker 3:
[02:40] Now, the S&P 500 recently hit a record high despite the conflict in the Middle East. Why has the stock market been able to move higher despite the oil shock from the war?

Speaker 4:
[02:52] Yeah, some of this is being applied to that TACO syndrome of Trump Always Chickens Out, that acronym. But I think it's more than that. I mean, for starters, first, the US is much more energy independent. So on one level, we're not in a situation that, say, Europe is where they're in other parts of Asia in particular, where they're facing real significant energy shortages. It's a real problem. We're seeing this in terms of jet fuel in Europe even right now. So for a little bit, the US market is seen as a little more resilient when it comes to the energy shock. For now, economists just say also that gas prices, yes, they may hurt parts of the economy, they may hurt especially lower middle income people. But in general, the US economy is less affected by higher gas prices than it used to be. And probably the most important thing for the stock market is analysts are very confident about their earnings outlook. And so when you put all this together, in the end, when you look at the stock market anyway, investors seem to be saying, well, not too concerned.

Speaker 3:
[04:07] Let's stick with investors. Are they shrugging off uncertainty or situations that could trigger volatility?

Speaker 4:
[04:14] Well, that's one of the questions is, we've written a couple of articles about this, are investors overly complacent? There's a parallel, a potential parallel, if you look back to 2022, when Russia invaded Ukraine, there was a knee-jerk reaction and then everybody thought, well, everything's going to be fine. But then, look at what happened. We had significant supply shocks that led to significant ramp up in inflation. The Fed famously said it was going to be transitory. It wasn't. There is an argument to be made that the markets are ignoring some real risks out there.

Speaker 3:
[04:51] Now, your market team is tracking the news that's coming out of earnings season. How much weight are company results carrying to keep investors' hopes high?

Speaker 4:
[05:01] Yeah, this is going to be really critical. Will companies provide the forward guidance in particular that will leave investors still confident about the pace of earnings growth? Analysts are generally expecting pretty decent numbers for Q1, double-digit earnings growth. The question is, can that be sustained? How much will the consumers take a hit from higher energy prices? Then, of course, the tech sector, there's a lot of questions about the impact of AI, particularly around software companies. People will be looking for guidance on that. But for now, if we were to get a disappointing earnings season, that could be a real problem for the stock market. But that doesn't seem to be on many people's radar.

Speaker 3:
[05:50] Now, Big Tech is scheduled to report earnings next week. Your team recently published an article highlighting two opposing trends for tech stocks this quarter. What are the crosswinds?

Speaker 4:
[06:00] Yeah, so the crosswinds are this. There are two main themes. The first is, there's that AI boom that we've seen since 2023 in terms of the infrastructure buildout, and that's particularly noticeable in these mammoth earnings growth for chip makers, for memory companies. So the physical buildout of AI data centers, that technology is continuing to roll ahead. And our analysts say that they expect that to continue to be the case this year. So we'll be watching on the infrastructure side for just how strong is that buildout? Is it continuing at the pace that people expect? But then there's the other side, which is the AI disruption. We're seeing that particularly in software, where there's growing concerns that these AI technologies are essentially going to upend these long-held, very strong software business models. It's a legitimate concern. The question is, how much? To some degree, some people will say it's overblown, at least in the near term. But there's some real long-term questions about what the earnings trajectories of some of these companies, and even just their basic business models are going to look like in a world where AI can do a lot of coding for you.

Speaker 3:
[07:25] Let's talk about the bond market. How has it performed during these geopolitical tensions while stocks have hit fresh highs?

Speaker 4:
[07:33] Yeah. Well, so the bond market had an interesting response to the war. Oftentimes, the US bond market is seen as a place to go for safety. But in this case, we had a little bit of a different reaction because of the oil price shock. Investors were already concerned about the inflation outlook in the US. Not so much worried that it was going to be going up. Inflation would be going up more, but more that inflation was just stuck at too high level above the Fed's 2% target. Then we had the oil price shock. Seems very clear that we've already begin to see some of that feed through to the inflation numbers. Question is, how long that will last. But with those inflation concerns on top of other issues already, such as the ballooning US government deficit, the bond market is bond yields have been moving higher. And so with bond yields moving higher during a time of uncertainty, a little bit of a different response. But when you look at the fundamental concerns about inflation, it makes sense.

Speaker 1:
[08:33] Lots of firms throw a couple flashy funds your way and call it a day, but not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline, it's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com/audio. That's vanguard.com/audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor.

Speaker 3:
[09:06] Another concern that has been building in the markets involves the private credit markets. What's the story there, and how does it tie back to what we've been seeing in the stock market?

Speaker 4:
[09:17] Yeah, so, you know, private credit had really been in boom territory for the last couple of years. It's gotten a lot more people's radar screen thanks to, you know, the public-private convergence, the idea that, you know, the private markets, private credit markets, which had really been the domain of big institutional investors and the super wealthy, you know, could be opened up through mutual fund products to smaller individual investors. So, you know, that was the backdrop, you know, as we went through last year, private credit had had great returns, was drawing in billions and billions of dollars. But then what happened was these software concerns, these same AI software concerns. Private software companies were very heavy borrowers in the private credit market. They make up a very high percentage of the private credit market, high percentage of some of these funds. And with the threat that AI poses to a lot of software business models, investors become concerned about these companies' abilities to pay back their debt. So we've seen a real significant markdown of software debt in the private market, software loans. And so we've had this connection between the stock market and private credit. Most analysts are saying that they don't think this is a systemic problem, meaning they don't think it's going to spread to other areas. Nevertheless, it's still fairly early and this market is very opaque. It's hard to really know what's going on day to day. They don't have to mark things day to day the way a regular mutual fund would. And these securities don't really trade. So there's a little bit of TBD on this. For now, there's definitely an impact. Private credit is going through a tough cycle. How bad it will get, we really don't know if it will get that much worse either.

Speaker 3:
[11:08] Inflation has spiked largely because of higher energy prices. The Marsh Consumer Price Index report shows inflation sitting at about 3.3 percent. So that's above the Fed's 2 percent target. Does this situation put pressure on the Fed to pivot when it comes to interest rates?

Speaker 4:
[11:26] Well, for now, Fed officials seem to be making it clear that they are very much in wait-and-see mode. Obviously, as we started saying in the beginning, we don't really know where we are even in terms of the outlook for the war. Oil shipments are still being held up. Energy prices are off their highest levels, but they're still up significantly from before the war started. Fed officials are maintaining that idea that this is, as I said a few years ago, still transitory, that this won't feed through to the broader economy. And at the very least, what it does mean is that the interest rate cuts that had been expected this year are off the table. At the same time, it's not clear that the Fed will need to pivot to actually raise interest rates. And of course, we're going through a transition here with the leadership at the Fed, waiting to see when Kevin Warsh gets confirmed as Fed chair. That's being held up by Washington politics. But the Fed's in an interesting position. At this point, it really just seems like they're just content to just sit pat, wait and see how things play out. And then they'll be able to decide which direction they're going to move.

Speaker 3:
[12:45] And let's stick with that transition that the Fed is experiencing. This Jerome Powell's term as Fed Chair is set to end in May. President Trump has nominated former Fed Governor, Kevin Warsh. Has Warsh signaled how he would lead the committee as they focus on balancing inflation and the job market?

Speaker 4:
[13:03] Well, this is a good question. It's, I think investors have learned that it's always very hard to tell very much from the testimony that officials give when they're going through their confirmation process. You know, Warsh has maintained that he sees Fed independence as critical. Theoretically, that means that, you know, if the Fed needs to raise interest rates, you know, he would be on board there. On the other hand, he has become, you know, a significant critic of Jerome Powell, had argued that interest rates should be lower. Of course, he's just one vote on the board among many. It's a little bit unclear at this point, you know, how that will play out, you know, in the end. We'll have to see what the numbers look like and how he presents himself and presents, presents, you know, his approach to running the Fed whenever the time comes that he's actually confirmed.

Speaker 3:
[13:59] Tom, what's the takeaway for investors watching big disruptions in 2026?

Speaker 4:
[14:04] Well, you know, the big takeaway is that we are definitely in an era where geopolitics throws a lot of, you know, curve balls at investors. It's really important at this point, you know, as it always is, but especially in these times for investors to really have their plan locked down in terms of their portfolio allocations, you know, pay attention to valuations, which over the long run really may make a big difference. You know, the trick is that sometimes these geopolitical disruptions can have real economic fundamental impacts, such as the supply chain shock that we saw after the Ukraine invasion. So, you know, on the one hand, investors definitely, you know, you know, the lesson is don't overreact, of course, you know, you do want to stick to your asset allocations that work for your financial plan. But at the same time, you know, we do have to pay attention to these things that are happening out there, because if we are, say, in a period where inflation is going to be higher than investors had expected, that can have a real impact on the markets and actually on the cash flows that people need.

Speaker 3:
[15:13] Tom, thank you for your time today and sharing your insights into what's going on in the markets.

Speaker 4:
[15:18] Glad to be here. Thanks for having me.

Speaker 3:
[15:21] That wraps up this week's episode. Thanks for making this show part of your day. A couple of reminders, give Investing Insights five stars on Apple Podcasts to help others find the work we're producing for you, and subscribe to Morningstar's YouTube channel to watch new videos from our team. Thanks to Senior Video Producer, Jake Van Kersen, Associate Multimedia Editor, Jess Bebel, and Multimedia Producer, Dale Coleman. I'm Ivanna Hampton, Lead Multimedia Editor, Morningstar. Take care.

Speaker 2:
[15:55] This recording is for informational purposes only, and should not be considered investment advice. Opinions expressed are as of the date of recording, and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar Inc and its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates, unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only, and the information, data, analysis, or opinion it includes or their use should not be considered investment or tax advice, and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from or related to the information, data, analysis, or opinions for their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. Please consult a tax and or financial professional for advice specific to your individual circumstances. Morningstar Investment Management LLC is a registered investment advisor and subsidiary of Morningstar Inc. The Morningstar name and logo are registered marks of Morningstar Inc.