Summary
- Energy Shock: The US and Israel strikes on Iran, and Iran’s response, have put pressure on a key oil chokepoint. With about 20% of global supply moving through the Strait of Hormuz, it doesn’t take much disruption to push prices higher and ripple through inflation and markets.
- Better Positioning: Compared to past energy shocks, the world is less dependent on oil per unit of output, thanks to efficiency gains and a more diversified energy mix. That doesn’t eliminate the impact, but it does reduce the sensitivity of growth to higher energy prices.
- Inflation Story, Not a Growth Alarm: Markets have adjusted by pricing higher inflation and fewer rate cuts, but equities have not fully reflected a slowdown in economic growth, which is something that could change if disruptions persist.
- Discipline Over Reaction: Geopolitical shocks often lead to short-term volatility, but markets typically recover as uncertainty is priced in. Reacting after the fact has historically been less effective than sticking to one’s investing plan.
The United States, alongside Israel, launched coordinated strikes on Iran on February 28th, and Iran responded in kind. Missiles, drones, and a widening regional conflict followed, raising the kind of uncertainty that gets everyone’s attention.
At first glance, this feels like the type of event that should change everything. And it could.
However, markets tend to approach these situations a little differently. They move quickly, they adjust expectations, and then they begin sorting through what actually matters and what might simply feel important in the moment. When people say the market is a discounting mechanism, this is what they mean.
All About Energy
The real story is energy. That is what markets are trying to gauge day by day.
Roughly 20% of global oil supply flows through the Strait of Hormuz, so even a partial disruption can ripple through fuel prices, transportation costs, and inflation expectations worldwide. That’s already happening. Oil prices have moved higher, particularly for grades tied more closely to Gulf supply such as Oman and Dubai.
In past energy shocks, refined products like jet fuel, diesel, and gasoline often rise faster than oil itself, and that dynamic is showing up again.
What are the downstream effects of all of this?
Well, higher fuel costs flow directly into airline margins, shipping rates, and freight costs, which then work their way through supply chains and into consumer prices. It doesn’t happen all at once, but it tends to persist.
Energy is the headline, but inflation and economic growth are the story. So far, it looks like an inflation problem, not yet a growth problem.
Different This Time?
The longer this disruption goes on, the greater the upside risk to prices and growth. The good news, however, is that we are all a little more insulated this time.
The global economy today is less dependent on energy per unit of output than it was in previous decades, due to improvements in efficiency and changes in the energy mix. Effects of higher energy prices are not eliminated entirely, but it does reduce the sensitivity somewhat, particularly when compared to earlier periods like the 1970s.
At the same time, how long this drags on still matters. A short-lived disruption is one thing. A prolonged constraint on supply is something else entirely, especially if it begins to affect expectations around inflation, policy, and growth simultaneously.
Market Reaction
To understand the market reaction so far, we need to go back a little bit.
Through January and into February, softer economic data, weakening consumer confidence, and a gradually weakening labor market fed a narrative that the Federal Reserve would begin cutting rates sooner than expected. The 10-year Treasury yield reflected that shift, bottoming out at 3.96%.
That environment has changed quickly. As we write this, the 10-year yield has moved up to 4.42%, short-term inflation expectations have pushed above 3%, and the market is no longer pricing in rate cuts for 2026 (two cuts were priced in before the strikes). Bonds, which started the year on solid footing, are now down roughly 2.5% since the strikes and negative on the year.
Equities have followed a similar, though less severe, path. The S&P 500 has experienced a peak-to-trough drawdown of around 7%, while gold, emerging markets, and international developed stocks have fared worse, all down double digits from their highs and giving back their year-to-date gains. Part of that divergence reflects greater exposure to energy costs abroad, along with the impact of higher real yields and a stronger US dollar on assets like gold.
Source: Bloomberg; Nova R Wealth. Gold represented by IAU ETF, Emerging Market Stocks represented by IEMG ETF, International Developed Stocks represented by IEFA ETF, US Small Cap Stocks represented by IJR ETF, and US Large Cap Stocks represented by IVV ETF. Past performance is no guarantee of future results.
The list of headwinds seems to be stacking up by the day, and it’s not hard to come up with reasons why this situation could get worse. On the other hand, investors have seen enough geopolitical scares resolve without lasting damage to corporate earnings. Perhaps, in this instance, the instinct to hit the panic button may have finally been coached out of the system.
History
If you take a step back and look across decades of market history, geopolitical conflicts tend to follow a recognizable pattern. There is usually an initial period of volatility as uncertainty rises, followed by a stabilization phase as markets digest the information.
Over time, returns have more often than not been positive following major geopolitical events, even over relatively short horizons. Extend that timeframe to several years, and the consistency of positive outcomes becomes even more apparent.
Source: Avantis Investors. Data from July 1926 to December 2025. Returns greater than one year are annualized. Past performance is no guarantee of future results.
This analysis does not mean that conflicts are insignificant. It simply reflects the fact that markets are forward-looking and tend to incorporate new risks into prices relatively quickly.
The Instinct to Act
Events like this often create a strong urge to make changes, whether that means reducing risk, raising cash, or waiting for more clarity.
Historically, that approach has not been especially effective.
Markets incorporate new information quickly, and by the time an event feels fully understood, a large portion of its impact has already been reflected in prices. Since expected returns tend to rise as prices fall, reacting after the fact can mean missing the recovery rather than avoiding the decline.
This is one of those situations where the most uncomfortable response, sticking to one’s plan, has often been the most rational one.
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