• Megadeal run undiminished by Middle East conflict
• Lufthansa, SAP among corporates forecasting Iran impact
• Cocktail of risks threatens almighty headache if equity party ends

“If you can lose your head when all about you are keeping theirs.” In an inversion of Rudyard Kipling’s If, those fretting about European stock market and M&A exuberance in the face of the Iran conflict may be beginning to question whether the herd is right.

Perhaps the market never lies. The Stoxx Europe 600 has rallied 6.5% since March lows; the continent’s astonishing M&A momentum in 1Q – with volumes of EUR 332.1bn up 38% year-on-year (YoY) – has been sustained into April.

The EUR 20.35bn club offer for Altice’s French mobile giant SFR, EQT’s GBP 9.8bn move for London-listed testing group Intertek, and Gilead Sciences’ EUR 4.3bn agreement to buy German biotech player Tubulis are just three of the deals currently anchoring Europe’s EUR 102bn M&A volume so far this month, according to Mergermarket data.

As this column has argued before, the coercive logic of the geopolitical and market moment is inescapable: larger corporations need to deploy the capital to build scale as political and trading alliances fracture and AI disruption takes hold, especially while paper consideration remains as valuable a currency as it does.

That may not be for much longer.

A correction is coming, according to Bank of England deputy governor Sarah Breeden. Speaking to the BBC earlier today (24 April), Breeden said the burden of risks set against asset prices at all-time highs will lead to “an adjustment at some point”.

The question is when. Breeden pointed to a cocktail of risks: “a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust – what happens in that environment and are we prepared for it?”

It’s a heady brew guaranteed to lead to a severe hangover once the party stops, with carriages set for just before 1H earnings.

As far as Continental Drift is concerned, the macroeconomic after-effects are already inevitable – we just haven’t felt the pain yet.

With stalemate between the US and Iran set to push the crisis into a third month, Brent crude today trades close to USD 104/bbl. International Energy Agency chief Fatih Birol has described the ongoing saga as the “biggest energy security threat in history”.

Eurozone inflation spiked to 2.6% in March from 1.9% in February; in the UK, that figure reached 3.3% in March versus 3% the previous month.

German flag carrier Lufthansa has cut 20,000 flights through to October – slashing its operations during what is meant to be the peak summer holiday season as jet fuel costs soar and availability looks shaky.

Even SAP, Europe’s sole global software giant – about as far removed from the heavy asset industries most impacted by raw materials inflation as it’s possible to be – reported yesterday that the Iran crisis “could potentially subject our business to materially adverse consequences should the situation continue”.

It’s worse for those industries with feedstock headaches. Europe’s beleaguered chemicals sector was already facing an influx of cheap Chinese imports and competitive pressures before crude prices jumped.

Owners of chemicals assets were heading to the door even before conflict erupted in the Middle East, with the likes of LyondellBasell and Saudi giant SABIC seeking to offload European assets to what we might euphemistically term special situations funds. The situation is even more grave now.

Indeed, Ineos founder Sir Jim Ratcliffe this week questioned whether his firm’s EUR 4.5bn investment in a new petrochemicals facility in Antwerp, Belgium might represent “Europe’s last meaningful investment” in the sector.

It has to be said, Ratcliffe is irked by a lack of European Union (EU) backing for the industry and such rhetoric is clearly designed to startle policymakers.

There is a concerning lack of strategic focus in the political response to the energy crisis. From London to Berlin, the briefings from ministers have focused on cost-of-living concerns and the preparation of packages to limit the impact on citizens’ pockets.

Subsidising the purchase of a scarce and essential resource is a dismal use of limited fiscal headroom. Immediate efforts should be focused on reducing energy consumption to the bare minimum necessary to keep the economy moving, while any government firepower should be dedicated to strategic resilience building, with a focus on gas supply, renewables rollout and electrification.

Ultimately, this is where the EU and other continental powers will end up. Which is why investments linked to electricity infrastructure – such as Engie’s GBP 10.5bn deal to buy UK Power Networks – look so smart a bet.

But it will take years to bear fruit from long-term planning dragged out of politicians who struggle to focus beyond the next news cycle. And even if there were a resolution to the Iran crisis tomorrow – which seems a distant prospect – much higher energy prices, disrupted supply chains and resultant inflation are now unavoidable, with the only unknown being their magnitude.

All of which makes the 1H reporting season an uncomfortable inflection point.

Energy costs juicing inflation will erode margins for many industries outside the oil majors. Cold, hard numbers will bear testimony to the economic fallout from the Middle East conflict.

Any market correction heading into, or resulting from, the upcoming earnings season could well dent megadeal appetite, with valuation concerns outweighing the unstoppable zeal for scale.

If we do see a swift end to the crisis, that may lift investors’ horizons out beyond transitory inflation headaches in 2026, sustaining M&A’s currently unstoppable run. As things stand, that seems a big if.