(The opinions expressed here are those of the author, Helen

Jewell, International CIO, Fundamental Equities, at BlackRock ( BLK ).

This column is for educational purposes only and should not be

construed as investment advice.)

By Helen Jewell

LONDON, May 21 (Reuters) - The Middle East conflict has

pushed oil above $100 a barrel, stoked inflation, dented growth

and forced central banks back toward tightening. Equity markets

may have stalled slightly in recent days, but they have been

hitting records for months. There are three key reasons why.

The first is earnings growth. Earnings drive markets over the

long term, and they are currently influencing the here and now.

Global earnings growth expectations stand at 20% for 2026, and

earnings-per-share forecasts have been revised up by more than

6% since the U.S.-Israeli attacks on Iran on February 28,

according to Goldman Sachs.

Energy earnings have driven much of this, of course, with growth

revised up a whopping 57%, as the price of oil has

soared. Yet many other sectors have also seen earnings

expectations increase since the end of February. This includes a

2% upward revision for technology - a sector that already came

into the year with bumper growth forecasts.

The main driver of this rosy outlook for tech - and for much of

the market - has been the enormous corporate investment into

artificial intelligence, a trend that has outweighed any

investor fears of a conflict-related earnings drag. AI capex is

expected to total nearly $800 billion in 2026. Analysis from

BlackRock Fundamental Equities estimates that the

cumulative total could rise to as much as $8 trillion by 2030.

This unprecedented spending push could represent a long-term

source of earnings support, especially for companies in the U.S.

and Asia that provide much-needed memory and power.

AI is also highly energy intensive. This technological

revolution coupled with the current energy shock is therefore

apt to speed up the energy evolution as governments increasingly

focus on energy independence and an "all of the above" strategy

involving both fossil fuels and renewables. Stock pickers may

find sizable earnings growth in areas such as energy

infrastructure, clean energy generation, power transmission and

energy efficiency.

VALUATIONS IN PERSPECTIVE

Valuations are the second reason, and they obviously follow

directly from earnings. Indices may be near all-time highs, but

valuations are not. Earnings growth in some areas of the market

has been so strong that price-to-earnings levels now actually

look less extreme than they did a few months ago.

In fact, the P/E ratio for the S&P 500 has dropped to

around 21.5 from pre-conflict highs above 25, largely because

earnings growth expectations have risen 6% since the conflict

began, according to Goldman Sachs. And it's a similar picture

for global stocks.

Most strikingly, the P/E ratio for technology stocks is

currently around 25, down from 36 at the end of 2025, according

to LSEG. Again, these levels reflect the strength of earnings -

the "E" - which has been boosted while the price - the "P" -

hasn't kept up.

We believe this is a sign that fears over market complacency may

be overdone. If there is a durable solution to the Middle East

conflict - and the Strait of Hormuz reopens - overall market

levels could march even higher, with leadership expanding beyond

AI-related winners.

Finally, we come to the third reason: flows. Robust earnings and

reasonable valuations have kept global investors in a risk-on

stance. BlackRock ( BLK ) data shows that flows into global

exchange-traded products amounted to $213 billion in April - the

sixth-highest month for inflows on record. Most of this money -

around $150 billion - went into equity products, while flows

into commodity funds were also positive. Given the strong

fundamentals of today's market leaders, this trend is unlikely

to reverse.

CLOUDS ON THE HORIZON

Yet risks remain. One is that oil prices may remain elevated

throughout 2026, leading to shortages of refined products,

higher inflation and lower growth. Equity valuations have

adjusted to reflect this uncertainty. (Indeed, this helps

explain why prices haven't kept up with earnings.) But we do not

believe markets have fully priced in this risk, particularly

given the size of the current supply shock and the building

pressure in the bond market.

A second risk is that the large AI spenders - such as U.S.

tech companies - reduce their investment plans, perhaps due to

shareholder pressure or a weakening consumer, just as extra

capacity for semiconductors comes online. This would upset the

supply-demand imbalance that currently favors chipmakers and

many other companies within the broader AI supply chain.

In short, questions about market complacency amid

geopolitical and macroeconomic uncertainty are legitimate. But

judging by the metrics that typically matter most - namely

earnings, valuations and flows - the current market environment

doesn't look frothy. It looks decidedly rational.

(The opinions expressed here are those of the author, Helen

Jewell, International CIO, Fundamental Equities, at BlackRock ( BLK ).

This column is for educational purposes only and should not be

construed as investment advice.)

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(Editing by Anna Szymanski and Marguerita Choy)