Can Markets Continue Their Upward Momentum Despite Growing Macro Risks?

Equities are hovering near record levels despite rising geopolitical and policy uncertainty, with TD Asset Management discussing whether the market can sustain its upward momentum. The article highlights potential portfolio implications from macro risks, including the Strait of Hormuz conflict, but provides no new hard data or policy event. Overall tone is cautious and analytical rather than decisively bearish or bullish.

Analysis

The market’s ability to hold near highs despite rising macro noise suggests liquidity and positioning are still dominating fundamentals. That is usually bullish until it isn’t: when uncertainty rises but realized volatility stays muted, investors tend to add leverage into strength, creating a fragility point where a small catalyst can force de-risking across crowded growth and momentum exposures. The key signal to watch is whether leadership broadens or narrows further; a narrow tape with defensive underperformance typically means the index can levitate for weeks, but the next drawdown can be abrupt once breadth rolls over.

Geopolitical risk in the Strait of Hormuz is less about a permanent supply shock than about a temporary spike in shipping, insurance, and inventory costs. The second-order winners are not just energy producers, but also firms with domestic supply chains, low import dependence, and pricing power; the losers are freight-sensitive cyclicals, airlines, chemicals, and any company running just-in-time inventories. Even if crude retraces, a higher risk premium can persist for months in tanker rates and regional insurance, which means the earnings impact may show up later and more broadly than the headline move in oil.

The contrarian setup is that markets may be underpricing how quickly geopolitical stress can tighten financial conditions without a recession. If oil spikes 10-15% and stays elevated for 6-8 weeks, it is enough to compress multiples in the most crowded duration assets, particularly long-duration tech and unprofitable growth, even if earnings estimates don’t move immediately. Conversely, if tensions de-escalate and implied volatility doesn’t reset lower, that would suggest markets are paying too much for tail risk and creating a tactical fade opportunity in hedges and defense-driven positioning.

The bigger takeaway is that investors are likely treating this as a headline risk when it is really a positioning risk. In a tape near highs, the first move on bad news is often continuation, but the second move depends on whether systematic funds and CTAs are forced to trim exposure; that’s where the real air pocket can happen. This argues for preferring selective hedges and relative-value shorts over outright index bearishness.

Key Decisions for Investors

• Buy short-dated downside protection on QQQ or SPY via 1-2 month puts financed with call overwrites; target a 2:1 payoff if a geopolitical spike triggers a 3-5% index drawdown.
• Go long XLE vs short XLY or XLI for the next 4-8 weeks; energy benefits from a risk premium while consumer and industrial margins are more exposed to input-cost pressure and multiple compression.
• Initiate a pair trade: long tanker/shipping exposure via FRO or TNK, short airlines via JETS or a basket of AAL/UAL/LUV; 6-10 week horizon with asymmetric upside if freight insurance and routing costs rise.
• Fade the most crowded long-duration growth names on strength with small starter shorts or put spreads in unprofitable software/biotech; if rates fail to back up but volatility rises, these names are most vulnerable to de-rating.
• If geopolitical headlines fade and crude gives back the risk premium, rotate out of defensive hedges into high-beta cyclicals only after confirming breadth expansion for at least 3 sessions.