Middle East conflict weighs on markets

Key Points

S&P 500 index downtrend continues; major turning points approaching
Interesting opportunities in individual themes
The crypto market remains surprisingly stable

Quick Recap: The Previous Week

Last week’s Pulse newsletter was written in a quite cautious mood. The Middle East conflict had begun to weigh on the stock market more clearly than before, and the S&P 500 index had fallen below the critical 6,800-point milestone. At that time, we summarized our analysis into three points:

The U.S. stock market is increasingly showing signs of a market top.
Geopolitical instability favors physical resources and the defense industry.
The crypto market remains surprisingly stable.

Stock Market in a Downtrend

Over the past week, the continuation and escalation of the Middle East conflict have pushed stock indices further downward. On Wednesday, the S&P 500 index dropped to its lowest closing level of 2026, approximately 6,625 points.

To quickly recap our analysis thus far, we wrote last week:

“At the beginning of February, when the S&P 500 index failed to cross 7,000 points, it began to look like we had transitioned from an uptrend to sideways movement.

After dropping below the 6,800-point limit this week, it is starting to look like we are no longer moving sideways, but are in an outright downtrend.”

Now that the stock market has turned into a declining trend, the next natural question is whether this is merely a correction within an ongoing cyclic bull market or a pivot into a true bear market.

From the perspective of these questions, the S&P 500 index is currently nearing decisive "watershed" levels. The 200-day moving average, often considered the dividing line between a bull and bear market, is currently within striking distance at approximately 6,616 points.

Roughly one percent below that lies the 6,550-point level, which served as a local bottom twice in late 2025. Dropping below this level would be a quite unambiguous signal that the bull market has been broken.

The retreat of stock indices close to the 200-day moving average often signifies one of two major turning points: either the best buying opportunity in a long time or, alternatively, a reason to significantly reduce equity exposure.

To be perfectly clear: our primary assumption is the latter.

Already back in mid-February, we began highlighting the hypothesis that the U.S. stock market might currently be near its top. While we did not have foresight regarding the start of the Middle East conflict, we thought the stock market has been giving signals of growing weakness since late January.

As we noted in last week’s Kvarn Pulse newsletter, the development of the Middle East conflict and its economic impacts depends largely on political decision-making. We do not pretend to be geopolitical experts in this situation; instead, we continue to rely on interpreting market developments, trusting that they will guide us in the right direction.

At this moment, it is clear that:

Stock market momentum is downward.
A break below 6,550 points would confirm the transition into a bear market.
Our basic assumption is that this break below 6,550 will occur, but we still want to see the markets confirm our expectation.

Investment Themes for a Time of Crisis?

In our previous Kvarn Pulse newsletter, we raised four investment themes that we believed could perform strongly during the Middle East crisis.

Starting with the weakest one, we first address the price development of gold. We use the Xetra Gold (4GLD) ETC instrument as our reference. Gold prices have come down sharply over the last two weeks. However, we note that it remains in a clear uptrend, well above its 100-day moving average.

Currently, our view is that gold still has plenty of structural positive drivers. We believe that once gold's short-term momentum turns positive, the recent sharp drop may lead to the development of the best buying opportunity in a long time.

A second theme suffering from a lack of short-term momentum is the defense sector. The price of the Amundi STOXX Europe Defense (EDFS) ETF has remained in a sideways movement between its moving averages.

We believe defense is still one of the relatively strongest sectors in the stock market. However, whether that relative strength is enough to provide positive absolute returns depends on the development of the Middle East crisis and energy markets.

On the other hand, the industry where absolute returns have remained clear is the energy sector (iShares MSCI World Energy Sector (5MVW)). Energy is the obvious winner of the ongoing geopolitical crisis, and the share prices of related companies are in a very strong uptrend.

The natural challenge of investing in energy during the early part of the year has been that prices have rallied relentlessly, offering few obvious "dips" as buying opportunities. However, in such a shifting macro environment, it may not be wise for an investor to over-optimize entry points, as the greater risk may be missing the move entirely.

While energy seemed perhaps the most interesting investment theme to us in February, we now name agricultural commodities as the most interesting theme of the moment. The price of the WisdomTree Agriculture ETF (AIGA) has just surpassed its local top from late 2025 and looks ready for an upward trend.

Our view is that as long as the Middle East crisis continues and/or escalates, these four themes will likely remain among the strongest investment categories. Of these four, gold and defense are suffering from the short-term shock of the conflict, but we believe their long-term outlooks remain positive. Energy, meanwhile, is the obvious beneficiary of the short-term shock, but we also see long-term potential there. However, we see the most potential in both the short and long term within the agricultural sector.

Whether an investor shares our view on these specific themes or not, one thing seems evident: at the index level, the short-term outlook for the stock market does not look bright right now. The ongoing disruption in energy markets is sharply dividing companies into winners and losers, and at the index level, the direction does not appear to be upward.

Those seeking returns from the stock market currently have to find them in individual sectors or industries. We are now in a "golden age" for active portfolio management, with the focus shifting heavily toward the defensive side. We will continue to monitor the situation and keep you updated!

Crypto Market Stable

In the general "risk-off" sentiment of the investment markets, the cryptocurrency market has remained surprisingly resilient. The price of the largest cryptocurrency, Bitcoin, reached a high of approximately $76,000 on Tuesday. Following Wednesday’s sharp sell-off in the stock market, the price has dropped toward the $70,000 level.

Despite the decline of recent days, the direction of the short-term trend still appears to be upward. As long as the price of Bitcoin remains above $66,000, our basic expectation for the crypto market remains optimistic, as surprising as that may feel in this market environment.

However, it is also worth reminding that the price of Bitcoin is still deep below its 200-day moving average. In a bear market, various "fake-outs" and "bear market rallies" are common and should be almost be expected. At this stage, one should still seriously consider the possibility that we might only be seeing a repeat of the January 2026 mini-rally before a drop to new lows.

Having given these warnings, we nevertheless state that there is currently positive momentum in the Bitcoin price, and considering the general "risk-off" mood of the investment markets, we find its price development to be strikingly strong.

The year 2026 has been a quite eventful time for investors, and it seems there will be no shortage of events in the coming weeks either.

Wherever the markets go, we will continue to monitor the situation and keep you informed, so stay tuned!