Why markets are unfazed by the Middle East conflict

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0:32Good morning from the Financial Times. Today is Thursday, June 26th, and this is your FT News Briefing. NATO members have finally figured out how to split the bill, and accounting firms are ready for their debut on the public market. Plus, why are U.S. stocks brushing off the conflict between Israel and Iran? There's so much swimming in markets' minds and investors' minds, it's hard to say which prevailing narrative is going to affect the market on any given day. I'm Mark Filippino, and here's the news you need to start your day.

1:10The Federal Reserve thinks U.S. banks should be allowed to take on more debt without having more capital on hand. The central bank said on Wednesday that it's going to slash the enhanced supplementary ratio for America's biggest lenders. This is one of the largest reductions in requirements since the 2008 financial crisis. And banks are going to be happy about this move. They've been calling on regulators to cool it with this ratio, saying it punishes lenders for holding onto low-risk assets like U.S. Treasuries. The Fed is planning a conference to discuss broader reform of U.S. bank regulation next month.

1:51U.S. stocks aren't being affected by the most recent conflict in the Middle East. In fact, the S &P is up since Israel launched strikes on Iran two weeks ago. So what's the deal? Why are investors shrugging this off? To help me answer that is the FT's Aidan Ryder, who's a reporter for the FT's Unhedged Newsletter. Hey, Aidan. Hey, Mark. So, Aidan, just how well have U.S. stocks been doing? They've been doing decently well. They've sort of been on this slow and steady climb in the past few weeks since Israel first struck Iran. We should note that while it's been on the steady upward move, there's only been one day where the move upward has been more than 1%.

2:26So this is not like jumps and happiness and glee. It's more like a steady plotting lineup. Got it. And do we have a sense of why this is happening? One theory, and I think it's been shown a lot over the last couple of years, is investors have kind of shrugged around tensions in the Middle East. Despite rising tensions around Israel and Lebanon and Syria and Iran, it hasn't really affected U.S. equity markets. And there's good reasons why it wouldn't. But, you know, when it came to the case of Iran, where there was really a high risk of global conflict that could affect the United States, it is somewhat surprising.

3:00Tell me a little bit more about what investors might be thinking here, Aiden. It's really hard to say. There's so many questions for investors right now. They're weighing the potential for tariffs to impact the U.S. economic outlook. They're also weighing the possibility of the U.S. potentially entering to a more drawn-out war in the Middle East, although that seems to have quelled for now. We also have questions around U.S. exceptionalism and people's interest in buying U.S. assets. There's so much swimming in markets' minds and investors' minds, it's hard to say what will actually happen and hard to say which prevailing narrative is going to affect the market on any given day.

3:35Do me a favor and put this all into context for us. How strange is it for equities to perform this way during a time like this? And by a time like this, I mean during times of conflict. It's not that strange at all, actually. First of all, markets are an imperfect gauge of geopolitical risks. But even so, over the last two years, markets have kind of learned to shrug off the attention to the Middle East. And if you look back at other times the U.S. has intervened in conflicts in the Middle East or in Central to South Asia, the market's actually gone up. So, you know, the three most recent examples, the U.S.

4:05attacked Afghanistan. then the market actually went up for the next couple of days on this like longward trend. That's part of the 9-11 recovery, but it was up. Same thing happened in Iraq. Bush gave a lot of warnings about going into invading Iraq, and the market really went up those days prior, and then was kind of flat afterwards. And then same thing happened when the US intervened in Libya. The market went up again. But the point is like, these are very different examples, and they have all these other background noise and things affecting the markets on their stays. So it's hard to take it as a rule.

4:34But it is interesting that that is in the general trend. So Aidan, what are you looking out for in the upcoming weeks and months in terms of the markets? I mean, it's impossible to say where things go from here. Of course, we'll all be looking very closely at tariffs and what happens at the end of the 90-day pause. With regard to the Middle East, we're going to have to wait and see what the ceasefire shapes out to be, right? Will it last? Will the U.S. have to get more involved? And if U.S. is more involved, would Iran take the not nuclear option, but quote, don't quote nuclear option, which is closing the Strait of Hormuz, which is where a lot of oil passes through.

5:06Once they take that option, that really can radically raise oil prices, and that will definitely have a flow through to the market. That's the FT's Aidan Ryder. Thanks so much, Aidan. Thank you.

5:22Nearly all NATO members have promised to increase defense spending to 5 % of gross domestic product. The joint statement was released at the end of the summit yesterday, and members pledged to meet the goal by 2035. As expected, Spain opted out. Still, it's a big win for U.S. President Donald Trump. He has spent years demanding NATO allies spend more, and if they didn't, he warned that Europe might not be able to count on the American military for protection.

5:56the accounting sector is getting ready to dive back into the public market analysts are expecting a wave of initial public offerings from firms in the next few years they tried this before in the 2000s but well that experiment didn't go too well and the sector is betting on this time being different. Here to explain why is the FT Stephen Foley. Hey, Stephen. Hi there. So why are we expecting a wave of accounting firm IPOs? Two words, private equity. The accounting industry has been through quite a big change over the last three to five years. Private equity, which has not normally been associated with this sector, has been pouring in.

6:39And lots of firms have given up the traditional partnership model where the equity in the firm is entirely owned by the senior accountants in the firm. In fact, more than half of the largest firms in the US now are actually owned by private equity firms. And at some point, private equity will want to sell out. So selling out to the public markets is likely to be one of the exit routes. And there's a second factor too, which is that some accounting firm leaders are looking at private equity and thinking, actually, I don't want to be owned by private equity. An alternative to the partnership model is a good idea.

7:18And they too are looking to the public markets. And that's what we've seen for the first time in the UK with MHA going public just a few months ago. Okay. So like I mentioned, the accounting sector has done this before. They've tried going public, but it ended up being a bit of a disaster. How come? Yeah, the UK had three accounting firms listed about a decade and a half ago. They floated on the stock market and then proceeded to buy lots of smaller accounting firms and bolt them together. But one by one, these all turned into quite big debacles. They took on too much debt. They didn't grow as fast as they were hoping.

7:59The integration of all these smaller firms didn't work. And two of them actually ended up going into administration. So that kind of put paid to the public market experiment in accounting for a good decade. So Stephen, how is the arrival of PE making accounting firms reconsider this? Actually, private equity have been imposing some financial disciplines, some efficiencies into the accounting firms that a number of people say will make them better suited for the public markets when they do finally get there. So that's one factor. The other two is I think public market investors are a little bit more familiar with professional services firms.

8:34One of the raps against investing in a professional services firm is the professionals, they can walk out the door at the end of the day, or they can take their clients with them. And that has always kind of put off investors. But private equity, which used to think that way too, has come around. And I think there is a sense that there is a value in the accounting firm brand. And then actually also equity can tie in those professionals as well. So there is a sense that you're buying something tangible too. Stephen, say a bunch of accounting firms do go public. What does that ultimately mean for the industry?

9:12Well, I think it'll turbocharge what we've been seeing already from the wave of private equity money coming in, which is this is becoming an intensely competitive and growth-oriented sector. There is a lot of desire to make investments in technology and to expand the service offerings that these accounting firms are offering to their clients. There's a lot more acquisitions being done as well. So this really could create a currency. Actually, the shares can be used to buy new things and to incentivize more people to join these firms. So in many ways, it could be very good for growth and for the expansion of the sector.

9:50That's the theory at least, but we'll be comparing to make sure that the same thing that happened a decade and a half ago doesn't happen again. Yeah, I bet. Stephen Foley is the FT's U.S. accounting editor. Thanks, Stephen. Thanks so much.

10:07You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

10:27The new episode of The Next Five is all about the freedom to invent with AI. Steve Tarza at Amazon joins me. I think there's such a huge opportunity for innovation, as does Jim Rowan at Deloitte. We see that when the C-suite is using AI, they get their teams on board as well. And Seth Fox at S &P Global. Our data is our crown jewels. We have to draw a bit of a line around the data, but not around the idea. Listen to The Next Five wherever you get your podcasts. Enjoy.

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