Market Impact of Israel-Iran Conflict
The Iran-Israel conflict and equity markets are now in sharp focus. As direct strikes escalated, oil prices surged by more than 10% in a matter of days. Gold and the U.S. dollar rallied as investors moved into safe-haven assets. What is crucial for investors to understand is that when markets are driven by bullish momentum, a catalyst is required to bring sellers into the market. Have we seen the early stages of that shift between buyers and sellers? While muted, the initial reaction to the start of the Iran-Israel conflict followed a familiar pattern in market behavior during geopolitical shocks: A rapid repricing of risk. A shift into defensive sectors. An eventual stabilization as policymakers and investors recalibrate expectations. The response to this conflict, in both direction and magnitude, mirrors those from previous regional military crises in the Middle East. For example, during the Yom Kippur War in 1973, the Arab-Israeli conflict triggered an oil embargo that quadrupled crude prices and led to prolonged equity market declines. Energy stocks and inflation-linked assets outperformed, while broader equities slumped. The 1979 Iranian Revolution and subsequent Iran-Iraq War again caused oil prices to double, with global equities suffering initially before recovering as new energy trade flows emerged. Given the market’s current overbought condition, what is the most likely historical outcome of the Iran-Israel conflict? Equity markets will likely experience further stress if the conflict persists or spreads to neighboring regions. U.S. equities could decline another 3% to 5% if oil prices sustain a move toward $80 to $90 per barrel. Higher energy prices may undermine central banks’ plans to cut interest rates in the medium term. After four months of falling inflation, Wall Street expectations are falling, but higher oil prices rapidly impact CPI reading, given the input of energy on consumer products. Therefore, if oil-driven inflation persists, rate cuts may be delayed until late Q4 or early 2026. Further rate-cut delays could keep markets more volatile as investors recalibrate future earnings expectations amid slower consumer spending. However, while short-term volatility is likely, in the long term, equity markets have historically recovered once tensions ease. If diplomatic efforts succeed in brokering a ceasefire or if both sides de-escalate military activity, global indices could rebound quickly. While there is undoubtedly a risk that the current Iran-Israel conflict could spiral into something larger, history suggests those odds are relatively low and that over the next 12 months any near-term impact will likely produce investment opportunities. Rather than trying to guess what markets will do tomorrow, successful investors assess various outcomes and plan accordingly. Building portfolios that account for downside risks, multiple economic scenarios, and margin of safety allows investors to remain calm when markets shift. The reality is that emotional decisions typically underperform disciplined ones. Investors can’t eliminate volatility - but we can control our reactions to it.
