Over the past year, markets have absorbed a remarkable number of geopolitical and policy shocks – trade tensions, political uncertainty, questions of central bank independence – yet global growth has remained resilient. Inflation has continued to trend lower, and equity markets in Europe and elsewhere have reached fresh highs.
The escalation of conflict between the U.S., Israel, and Iran introduces a new variable. From an investment perspective, the critical transmission channel is energy, specifically, oil markets.
Why Oil Matters
The Strait of Hormuz, which runs along Iran’s southern coast, carries roughly one in five barrels of oil consumed globally. The degree to which energy shipments through this chokepoint are stalled should be a major determinant of whether this conflict becomes an economic shock.
There appear to be two potential broad scenarios:
Contained disruption: If the Strait remains open and other producers increase supply, as OPEC+ has already signaled, oil prices could rise modestly.
Prolonged shutdown: A sustained disruption of oil flows through the Strait could push prices meaningfully higher. In that environment:
Each sustained $10 rise in oil has historically shaved 0.1 – 0.2% from growth over the following year.
U.S. Resilience and Global Spillovers
The U.S. is far more energy self-sufficient than in past decades, importing just 17% of its energy needs. That should provide some buffer. However, global oil benchmarks still determine gasoline prices, and higher prices would likely pressure consumers and corporate margins.
Asia and Europe would likely feel more direct strain, particularly China and other large importers of Gulf energy.
Historically, periods of elevated Middle East tension have also supported a stronger U.S. dollar, another factor that can influence global markets and asset performance.
Market Context
This conflict arrives at a sensitive time for markets. Equity valuations in parts of the U.S. remain elevated, expectations for AI-driven growth are high, and investors are anticipating rate cuts from the Fed. A sustained energy shock could complicate that outlook and weigh on sentiment.
How We Are Managing Portfolios
Periods like this reinforce why we emphasize durable, resilient portfolio construction rather than attempting to predict individual geopolitical outcomes.
Our focus remains on:
As always, we will continue to monitor developments closely. If the probability of a more severe energy shock rises, we would reassess our positioning within the context of each client’s long-term objectives and risk tolerance. Please do not hesitate to reach out with any questions or if you would like to discuss your portfolio.