Geopolitics, Fed Jitters Push Investors to ETFs

Market commentators describe coming into the year with US stocks viewed as fairly valued and supported by double digit earnings growth, improving margins, and positive corporate guidance. Fiscal and monetary stimulus, tax refunds and deregulation were seen as reinforcing a constructive setup, even though it is unusual to be in a fourth year of a bull market.

The situation with Iran has emerged as a major new risk, raising oil prices and threatening to undermine that bull market thesis. Panelists note that energy costs filter through logistics and across the economy, and that persistently elevated oil could pressure profit margins and eventually earnings estimates if it does not prove temporary.

Despite the geopolitical shock, some argue the bull market case remains intact for now, with investors possibly complacent but still expecting a resolution that would allow oil prices to retreat. Recent market weakness has been accompanied by relatively thin trading volumes, which was characterized more as a pause than a wholesale exit from equities.

Debate is intensifying around the Federal Reserve’s next move. Commentators highlight that the key question is whether the Fed’s next step will be a cut or a hike, recalling how policy tightening in 2022 affected markets. Weekly jobless claims remain stable, suggesting no sharp labor deterioration so far.

The OECD recently raised its US inflation estimate from 2.8% earlier in the year to 4.2% over the next 12 months, a shift described as significant for Fed deliberations. While the current policy rate range is viewed as historically low, a tilt toward tightening would be seen as a less favorable backdrop for taking risk over the next couple of years.

At the same time, S&P 500 (SPX) earnings estimates have continued to rise into the 300s, and analysts have not yet made broad downward revisions. Some market participants argue that recent price declines reflect skepticism that companies can deliver the double digit earnings growth implied by those forecasts.

Trading data from Charles Schwab (SCHW) show that its Schwab Trading Activity Index fell about 2% during a period when the broader market pulled back roughly 7.5%. Schwab reports this did not reflect large scale de-risking, but rather a shift toward diversification and lower volatility positions.

In March, five exchange traded funds appeared among Schwab clients’ top 10 buy list, whereas that list is usually dominated by technology stocks with only one or two ETFs. These were broad market ETFs rather than narrowly focused sector products, suggesting an effort to stay invested while reducing single stock risk amid geopolitical concerns.

Alongside ETF buying, Schwab observed strong demand for oversold large cap names such as Nvidia (NVDA), Tesla (TSLA) and Microsoft (MSFT). Microsoft (MSFT) was noted as being down about 25% to 26% year to date at one point, with investors viewing such stocks as core long term holdings that could be acquired at a perceived discount.

Commentators on a separate panel highlight continued interest in technology, including established software leaders and companies linked to artificial intelligence infrastructure. Microsoft is cited as trading at its lowest valuation relative to the S&P 500 (SPX) in a decade, even after a decline of about 36% from its high and 20% year to date, drawing attention from stock pickers focused on long term prospects.

Riskier opportunities discussed include Sterling Infrastructure, described as benefiting from AI related buildouts, and Oracle (ORCL), which was picked after it began to recover off its lows but remains well below its 52 week high. Panelists emphasize that ongoing headlines around AI partnerships and competitive positioning, including developments at OpenAI, are influencing sentiment toward related stocks.

Outside technology, financials and healthcare are flagged as sectors under pressure. Financials have been among the weakest performers this year, reflecting concerns about slowing economic growth, inflation and the impact of delayed rate cuts. Healthcare has also sold off despite solid fundamentals in some names, with observers attributing this to broad portfolio de-risking rather than company specific deterioration.

Recent market volatility has prompted discussion about how newer investors, especially millennials and Gen Z, are responding. Some analysts point out that this cohort’s first major market crisis was the sharp 2020 downturn followed by a rapid V shaped recovery, shaping expectations that pullbacks are brief and quickly reversed.

Panelists caution that such patterns may not repeat, and that the current environment could feature a more drawn out adjustment as earnings expectations and second order economic effects are digested. They also highlight the risks illustrated by prior episodes in meme stocks and cryptocurrencies, where investors who continued buying into declines often faced sustained losses.

For longer horizon investors, commentators stress the importance of diversified portfolios, dollar cost averaging and distinguishing between core holdings and higher risk positions. Some advocate trimming but not fully exiting long term winners during rallies, given tax considerations and the difficulty of timing peaks and troughs, while keeping speculative exposure small relative to overall assets.