February’s Growthy Data—and the Iran War’s Souring Sentiment

Sometimes, a sudden turn in world events makes economic analysts we follow demonstrate agreement with something our research has long supported: All data are backward-looking. We saw it last spring, when commentators we follow largely dismissed early-year economic indicators with a yah, but that was before tariffs. Now it is happening again. Whether it is Rachel Reeves’s “Spring Statement” of economic forecasts or the latest spate of purchasing managers’ indexes (PMIs, monthly surveys that track the breadth of economic activity), headlines we follow are greeting new data with yah, but that was before Middle East conflict erupted. The implication: The war upends global economic fundamentals and risks truncating this expansion. We see positive surprise potential building here for stocks.

Let us look at this through the PMI lens. PMIs, based on our dashboard, are the timeliest monthly economic snapshot, with preliminary versions arriving amidst the covered month and final versions immediately after month end. They don’t measure output and aren’t perfect, in our view. But they tabulate how broad-based growth is, which we find useful. Readings over 50 indicate expansion, with a higher reading meaning more widespread growth—which most analysts and economists we follow interpret as an acceleration. S&P Global produces services, manufacturing and occasionally construction PMIs for most developed and major emerging markets, along with a handy global PMI that combines all these together.

In February, the global composite PMI (manufacturing and services output combined) rose from 52.6 in January to 53.3, a 21-month high.^[i] Services and manufacturing each ticked up, with export orders also expanding for the first time in a year. Amongst manufacturing highlights, the long-beleaguered eurozone flipped to expansion at 50.8, a 44-month high, with forward-looking new orders finally up.^[ii] Germany, which has endured long-running weakness, jumped from 49.1 to 50.9, with new orders rising there, too.^[iii] US manufacturing slowed a bit but stayed expansionary, whilst China’s manufacturing PMI surged from 50.3 to 52.1.^[iv] UK manufacturing ticked a bit slower, but new export orders notched their fastest growth in four and a half years.^[v] Manufacturing may be a small chunk of output in all these nations, but given how weak it has been since COVID, we think improvement is a positive.^[vi]

Services—the bulk of economic activity—also looked good.^[vii] China’s services PMI jumped from 52.3 to 56.7, an almost three-year high.^[viii] US services slowed, matching manufacturing, but the UK’s stayed strong at 53.9 with continued new order growth.^[ix] The eurozone also improved, again boosted by Germany (up from 52.4 to 53.5), and Japan was solid again.^[x] So were the non-oil private sectors in the UAE (55.0), Kuwait (54.5) and Saudi Arabia (56.1).^[xi] Based on all these reports, around the world, business activity is growing across the vast, diverse range of services that drive growth.

Ordinarily, we find the more attention improving economic fundamentals receive, the more markets price them. As expectations lift to match this improvement, we find economies usually need ever-faster growth to continue delivering the positive surprise our research shows pushes stocks up the wall of worry. Yet, based on our observations, the widening Middle East conflict is knocking society’s economic expectations. We think this helps prime a market recovery because it increases positive surprise potential.

In our view, this means all the negative chatter we see about conflict roiling the global economy would have to prove overly pessimistic for stocks to climb this wall of worry. If it turned out they weren’t pessimistic enough, we think stocks would have to price that, and it would likely be negative. But in this case, it looks to us like the negative speculation is overshooting. With drone attacks now spreading to Azerbaijan, the conflict’s global footprint is 3.5% of GDP.^[xii] The actual activity lost in these places is a likely fraction of the whole.

What about oil and natural gas? Prices today remain well short of spikes in 2022, when sanctions and general blowback from Russia’s invasion disrupted global supply and sparked projections of severe shortages.^[xiii] Those estimates didn’t come true. Neither did a global recession (period of contracting economic output), even though Germany and a handful of others struggled.^[xiv] Oil prices’ spending much of the year over $100 didn’t crush output or consumer demand.^[xv] This isn’t the 1970s, when the global economy was more energy-intensive and the Middle East was a major production swing factor.^[xvi] Growth is much more energy-efficient now, whilst global energy production is broader.

This also cuts against chatter we saw around of the Strait of Hormuz’s closure choking global growth. As we wrote earlier this week, closure is a misnomer. The Iranian Navy doesn’t operate official gates or checkpoints in this narrow waterway and likely can’t officially close it to traffic. Whilst ships have dropped anchor outside the Strait, this appears to have more to do with insurers cancelling policies and raising rates to compensate for war risk.^[xvii] The US Development Finance Corporation is now stepping in as insurer of last resort, a programme we have seen some suggest could be so effective that it generates an existential threat for London’s insurance marketplace—an implicit admission, in our view, that tanker traffic likely resumes soon.^[xviii] US Naval escorts add another layer of protection for passing ships, as they did for ships traversing the Red Sea when Yemen’s Houthi rebel militia attacked them in 2023.^[xix] Furthermore, Saudi Arabia is already pushing more output through pipelines that avoid the Strait, and Venezuela’s backlog of oil and gas is in motion toward western nations, now that sanctions are gone.^[xx]

The insurance issue is just one place commentators we follow seem trying to have it both ways. Here is another alternate scenario to think through: What if oil and gas prices stay high? That means higher oil rents for all the petrostates currently under attack, which feeds into their economies and their sovereign wealth funds’ international investment. An economic positive. It also means higher revenues for price-sensitive oil and gas firms producing across the US, North Sea, Canada, Australia, Brazil, Argentina, on and on and on. These, too, feed into local investment and growth.

A suggestion: Tragic as war is, resist the temptation to think of any geopolitical development as automatically good or bad from an economic standpoint. Years of research tells us that isn’t how markets or the world work. Instead, try thinking through the framework of likeliest winners and losers. We find all change creates winners and losers. But when the winners outweigh and outnumber the losers, and when the losers aren’t surprising, we think that sets the stage for stocks to defy sentiment and conventional wisdom. To us, that stage looks nicely set today.