Global equities have fully recovered losses sparked by the Iran conflict, with major indexes now back at or above pre-war levels as investors unwind defensive positions and refocus on growth themes, particularly artificial intelligence.

The MSCI World Index initially dropped over 3% in the week following the outbreak of tensions but has since rebounded to fresh highs, now trading above early-March levels. The speed of the recovery has caught some analysts off guard, especially as the conflict remains unresolved and ceasefire conditions appear fragile.

Strategists say the rally has been driven less by improving fundamentals and more by the rapid removal of war-related risk premiums across equities, oil, and currencies. As expectations shifted away from worst-case scenarios such as prolonged disruptions in the Strait of Hormuz, investors quickly reversed defensive positioning, fuelling a sharp rebound.

Markets also appear to have priced in a contained conflict early on, with some viewing the initial selloff as an overreaction. Short covering by hedge funds further accelerated the upside once ceasefire hopes emerged. However, recent signs of strain in negotiations have already led to some pullback, suggesting the rally may be conditional rather than stable.

Geopolitical risks remain in focus after renewed warnings from Donald Trump, who signalled the possibility of further military action if no agreement is reached.

Beyond geopolitics, a resilient macro backdrop has helped support sentiment. U.S. economic data, particularly in the labour market, has held steady, while expectations for potential Federal Reserve rate cuts later this year remain intact.

At the same time, strong momentum in artificial intelligence continues to underpin equity markets, especially within technology sectors. Investors are increasingly looking past short-term geopolitical risks and focusing on longer-term growth drivers, including AI, automation, and innovation-led earnings expansion.

That shift in sentiment has revived risk appetite, with flows returning to cyclical sectors and smaller-cap stocks alongside continued strength in AI-linked names. Still, not all markets are aligned. Fixed income indicators suggest a more cautious outlook, with bond markets continuing to reflect concerns around inflation and potential economic slowdown.

The divergence highlights an underlying tension: while equities are pricing in resilience and recovery, other asset classes remain wary of lingering risks tied to energy shocks and prolonged geopolitical uncertainty.

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