What does a market bottom look like this time?

The Iran conflict has created an overhang for equity markets that belies relative structural strength underneath. In the United States in particular, corporate fundamentals have remained positive, earnings growth has stayed strong. While the potential dual shock of higher inflation and lower growth that comes with an energy spike could still impact these companies, North America remains energy independent and certain regional prices for key inputs like natural gas have stayed low. At the same time, few of the traditional safe haven assets have worked like they should. Gold prices have come off historic highs and long-dated US treasuries have shown positive correlation to equities. With few alternatives to equity allocations showing promise, the question shifts to how equity investor can endure.

Paul MacDonald, President and co-CIO at Harvest ETFs, and James Learmonth, co-CIO at Harvest ETFs, explained some of the trends that were forming before this conflict introduced a new wave of volatility. They noted that a negative feedback loop between media headlines, investor sentiment, and market volatility has started to take hold. At the same time, however, they noted how markets are beginning to see past periods of negative stimulus and offer signs of a possible recovery.

“One of the things that has served me well over the course of my career is measuring the intensity of reactions to bad news. It’s not to put it too simply, but: if a stock doesn’t do what it’s supposed to do in reaction to some news event, be it earnings, a war, an oil shock, then it’s probably going to do the opposite,” Learmonth explains. “Very early in this conflict, we saw the expected types of moves. Oil prices shot up, everybody worried about inflation again, stocks sold off because it could derail a nascent economic reacceleration. But what we’re already starting to see is reports of power plants being bombed, energy infrastructure being attacked and destroyed, and the oil price movements are not having the same level of volatility as even just a week or two ago. That’s generally an early sign that investors have already priced in that this will happen.”

Tail risks remain a real concern for markets, and a further escalation in the conflict could cause additional volatility, Learmonth explains. However, the willingness by markets to move positive on the back of any good news was demonstrated early last week by hopeful reactions to possible diplomatic progress. Learmonth notes, too, that the underlying trends in equity markets could potentially remain in place should the conflict resolve.

Before the outbreak of war, markets had seen a period of rotation, away from quality growth tech names and towards some market laggards like consumer staples, healthcare, and industrials. Investors were gaining confidence about a US economic re-acceleration, as well as the prospect of interest rate cuts by the Fed. US stimulus was also beginning to work its way through the system, driving growth in more cyclical areas of the market. The war has become the primary, though not sole, overhang to that market trend in Learmonth’s view.

Fixed income has become an increasingly difficult area to navigate amid these shocks. MacDonald explains that while mid-duration bonds have held up on a total return basis, the broadly choppy, downward trending environment for longer-duration has become problematic. He explains that Harvest ETFs runs a suite of strategies applying covered call overlays to fixed income ETFs, and that over the longer-term that covered call premium has helped contribute more to total return.

Learmonth adds that covered calls on equity strategies can also help with total returns in this environment. With few other safe havens to cling to, and with strong fundamentals in key US equity sectors, the additional income that comes with covered calls, can serve to support longer equity exposures through volatility, and manage the behavioural impact of a temporary drawdown. He notes that certain equity sectors have still held in better, including utilities which are staying strong despite recent increases in valuation. The aforementioned regional stability of natural gas prices in the US has helped US utility names in particular stay intact. MacDonald emphasizes that despite short-term narrative shocks in the market, a wider trend towards market growth can still be found.

“We have to take a step back. In just the past 18 months alone, there have been wars in Eastern Europe, wars in the Middle East, trade wars, tariff wars, sovereignty questions,” MacDonald says. “All of these have been ongoing, yet markets have trucked to new highs. To get to new highs from here, we’ll need stabilization. But I don’t want to underestimate the power of markets and people wanting to be invested.”

While tech has lagged this year before the outbreak of war, Learmonth notes that there is the possibility of it reasserting leadership should risk appetites resume, much as it did in the relief rally following ‘liberation day’ in 2025. The sector’s strong revenue growth and relative insulation against oil shocks could make it another leader once investors start seeing through the valley.

The fact that few sectors are providing real negative correlation to broad equity market trends points, in Learmonth’s view, to the continued value of staying invested. Advisors, he argues, can work well on the behavioural side to demonstrate why what can feel apocalyptic in the news isn’t doom for the portfolio.

“This is the type of environment where an advisor can actually prove themselves to be the steady hand and help refocus clients on the long-term picture, the fundamental picture,” Learmonth says. “Yes, the war is happening. Energy prices are skyrocketing. Every day you see oil through $100 and you go to the gas pump and see gas at $1.78 a litre here in Canada. But that is not necessarily impacting the individual companies you hold in your portfolio any more than it’s impacting other companies. This is where you separate the broad economic uncertainty from deteriorating fundamentals at a specific investment.”