Concerns about the ongoing conflict in Iran are prompting investors to think about the potential for escalating hostilities, a crisis reminiscent of 1974, a looming global recession, and the possible end of the current bull market. Yet, it’s crucial to stay composed, at least for now.
While the human cost of wars is devastating, capital markets tend to be unforgiving. Regional conflicts, no matter how tragic, usually don’t disrupt stock or oil prices for long.
The pattern is generally predictable. First, the mounting tension leads to increased uncertainty, causing volatility and rising oil prices. Then the initial hostilities may shake the market, resulting in a further dip as investors process the worst-case scenarios. Finally, stocks often rebound even before the fighting ceases as investors begin to reckon with the limited economic fallout and recognize that global growth will likely continue.
Historically, the S&P 500 surged by 12.5% during Desert Storm and climbed 31.9% in the year after. Despite the protracted conflicts in Afghanistan and Iraq, the bull market was largely unaffected. The lead-up to the 2003 invasion of Iraq coincided with the end of a lengthy bear market that lasted from 2000 to 2003. In fact, the initial bombing didn’t adversely impact stock prices or GDP, contributing to a notable surge of 33.1% in global stocks and 28.7% in U.S. stocks.
This scenario is unlikely to change this time around.
While Russia’s invasion of Ukraine occurred early in a minor bear market—also tied to energy issues—correlation doesn’t equal causation. A multitude of factors affected investor sentiment in 2022, like inflation, supply chain issues, and rising interest rates, along with an increase in stock supply. Even with ongoing conflicts, the stock market has generally rebounded.
Concern over the Gulf Coast’s significance as a manufacturing and transportation hub persists. Still, these nations account for just 3.5% of global GDP, and before the conflict, Iran contributed only 3% to global oil production. Analysts had previously forecasted a 3% growth rate for 2026. Additionally, Iran’s oil exports are primarily directed to China, which ramped up its purchases by 16% in the early months of the year, indicating they might be preparing for increased demand.
Shipping is crucial here. It’s often said that 20% of the world’s oil travels through the now-closed Strait of Hormuz, though much of it is meant for processing rather than export. There are existing alternate pipeline options that mitigate a significant portion of the oil typically routed through Hormuz.
This isn’t the 1970s when the U.S. heavily relied on imported energy, and many in the Middle East held animosity toward America. Today, the U.S. stands as the top oil producer and exporter, maintaining good relationships with most exporting nations in the region—except for Iran. Back then, it would take nearly one barrel of oil to generate $1,000 of inflation-adjusted U.S. GDP; currently, it’s only a quarter of that.
Markets will adjust and anticipate the reopening of the Straits, regardless of how fear-driven investors react. It’s probable that oil prices will revert to their pre-war levels in January. Historically, during nine major oil-related regional conflicts since 1980, oil prices initially rose by an average of 5% within the conflict’s first month; however, six months later, prices dropped 4% below their starting point, and a year later, dipped an additional 5%.
Oil prices saw an increase from $55 to $67 prior to the recent bombing in Iran, but once normalcy resumes, prices are expected to return to the lower end of that range.
But what if I’m incorrect? Oil prices remained above $75 per barrel for much of 2023, the global economy appears robust, and stock prices have increased by over 22%. During the early 2010s, $100 oil fueled economic growth and rising stock prices for years. With about 45% inflation since then, $100 oil today holds about the same value as $65 back then.
On the political front, if the conflict remains unresolved by August, the Republican party could face significant setbacks in the midterm elections. However, as predicted for 2026, this outcome seems likely anyway; it creates a sort of “urging” for Trump to bring a swift resolution to the situation.
So, there’s no need to panic. The stock market will eventually take a realistic view on the war—perhaps you should too.
