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Welcome to the May Edition of Xtrackers Spotlight!
While the Iran conflict remains unresolved, equity markets will likely look back on this phase as yet another V-shaped recovery and another episode where “buying the dip” proved effective[1]. Beyond the initial market reaction, recent price action could be interpreted as consistent with a refocusing on underlying macroeconomic and corporate fundamentals, rather than crisis narratives. We explain why we see valid reasons for optimism, which pre-conflict trends appear intact, and where caution may still be warranted.
A familiar pattern: markets looked through the initial shock
Don’t get us wrong, the The escalation in the Persian Gulf triggered a sharp risk-off move in March, but markets sold off in an orderly rather than disorderly fashion. Fast forward two weeks into April and the S&P 500 had already recouped its losses, pushing to new all-time highs as ceasefire expectations took hold.[2] What looks counterintuitive on the surface is in fact familiar (see chart below). Markets worry far more about extreme tail risks than about an unresolved conflict itself. In the case of Iran, once escalation scenarios became better defined and those tails faded, risk premia compressed quickly and focus shifted decisively back to fundamentals.[3]
Not the first rodeo ride – markets reacted in line with historical patterns
S&P 500 average post-crisis performance of 30 events since 1939, indexed to 100 at the event date
Source: DWS International GmbH, Bloomberg, as of 23rd April 2026. Past performance is not a reliable indication of future performance.
Equally familiar is the renewed dysfunction of traditional diversification. Government bonds have come under pressure from both the fiscal backdrop and an uncomfortable growth‑inflation mix, with inflation once again taking the lead. This has dealt another blow to the near‑term effectiveness of the classic bond–equity framework as a stabilising anchor in portfolios and raises important questions about how to balance portfolios in the second half of the year.
Another recurring feature of recent shocks is that Europe once again appears to end up picking up a disproportionate share of the bill. The region has lost near‑term momentum, lacks the earnings‑driven support seen in the U.S., and remains more exposed to elevated energy costs – now a clear drag on growth expectations and sentiment.
Taken together, these three patterns point to the same conclusion, though: Markets are not ignoring geopolitical risk – they are pricing it where the fundamental impact is most direct, in energy prices and rates, while equity markets remain supported by resilient earnings.
Dispersion across asset classes since the onset of the Iran war
Returns across different asset classes since the start of the Iran war
Source: DWS International GmbH, Bloomberg, as of 24th April 2026. Past performance is not a reliable indication of future performance.
Markets have moved on: Earnings remain the anchor
Zooming in on fundamentals is critical. It is not only investors who have moved on from the headlines – earnings have done so as well. Through the conflict, the profit outlook has strengthened rather than weakened in many areas. Consensus now expects S&P 500 EPS growth of 18.4% in 2026[4], up from 15.4% at the end of February, as the U.S. (large-cap segment) once again stands out as the global earnings engine.[5]
We see this as a core reason why equities may currently offer a superior risk-reward profile compared to bonds. Equities can, in principle, absorb a certain degree of inflation, as it tends to feed through to higher revenues and ultimately corporate profits.[3] Yet, it should be noted that further increases in bond yields could eventually start weighing on equity valuations as well.
That said, the broader takeaway is not one of complacency. Short‑term uncertainty has also distracted from intact earnings trajectories outside the U.S. Even into May, pockets remain where fundamentals are holding up, valuations have repriced, and entry points look more compelling than before the dip.
This also means investors can continue to lean on several pre-crisis trends. Korea, Japan, and broader emerging markets, for example, now trade on cheaper multiples despite improved earnings expectations (see chart below) – strengthening the case for regional diversification.
Certain markets look even more compelling than before the crisis
Selected equity market valuations and 2026 EPS revisions since the start of the Iran war, based on MSCI Large & Mid Cap country indices
Source: DWS International GmbH, Bloomberg, as of 17th April 2026. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.
Japan, for example, combines low-double-digit EPS growth with improved political stability under Prime Minister Takaichi and ongoing corporate governance improvements.[6] For a more detailed analysis of emerging markets, we refer to our previous Spotlight.
One important caveat: a tilt towards non-US equities should not be mistaken for a disengagement from technology. AI remains the central structural driver of global equity markets, supported by tangible monetisation, capacity constraints and sustained investment in AI infrastructure.[7] A material underweight to this theme would carry its own risk – also for a portfolio explicitly focused on regional diversification. On top of that, AI valuations look significantly more attractive on a 12-month forward basis now, as EPS expectations have risen sharply[4].
The Nasdaq Global AI & Big Data Index is cheaper than ever
12-month forward P/E ratio, in USD
Source: DWS International GmbH, Bloomberg, as of 28th April 2026. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.
In Summary
Risks to the view:
Systemic shocks—such as recessionary pressures or geopolitical dislocations—trigger broad risk-off sentiment, with equities typically bearing the brunt. Defensive sectors may underperform if inflation reaccelerates or central banks turn more hawkish. Market leadership can rotate quickly, especially if investor sentiment shifts toward cyclical or speculative growth.
Key Risk Factors Xtrackers UCITS ETFs:
An investment in an Xtrackers ETF may not be suitable for all investors. Xtrackers UCITS ETFs are not capital protected, therefore investors should be prepared and able to sustain losses up to the total loss of the capital invested.
Investors should be aware that DWS Investments UK Limited, any of its parents or any of its or its parents subsidiaries or affiliates may from time to time own interests in the funds which may represent a significant amount or proportion of the overall investor holdings in the Fund. Investors should consider what possible impact such holdings, or any disposal thereof, may have on them.
Substantial fluctuations of the value of the investment are possible even over short periods of time.
Investments in Xtrackers UCITS ETFs involve numerous risks including but not limited to general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the Xtrackers UCITS ETFs, possible delays in repayment, market fluctuations, counterparty risk, foreign exchange rate risks, interest rate risks, inflationary risks, liquidity risks, loss of income and principal invested and legal and regulatory risks.
Movements in exchange rates can impact the value of your investment. If the currency of your country of residence is different from the currency in which the underlying investments of the fund are made, the value of your investment may increase or decrease subject to movements in exchange rates.
Shares in Xtrackers UCITS ETFs which are purchased on the secondary market cannot usually be sold directly back to the fund. Investors must purchase and redeem such shares on the secondary market with the assistance of an intermediary (e.g. a market maker or a stock broker) and may incur fees for doing so (as further described in the prospectus). In addition, investors may pay more than the current net asset value of a share in a Xtrackers UCITS ETF when buying shares on the secondary market and may receive less than the current net asset value when selling such shares on the secondary market.
The value of an investment in Xtrackers ETFs may go down as well as up. Past performance does not predict future returns.
For further information regarding risk factors, please refer to the risk factors section of the relevant prospectus and the Key Investor Information Document.