Overview

The recent conflict that started on February 28, 2026 with the U.S. and Israel launching an offensive against Iran has rattled investment markets around the globe. Since the conflict started, U.S. equity markets have declined less than 1% and the U.S. 10YR Treasury yield has risen approximately 10 bps (0.10%). These rather benign moves are in sharp contrast to European and Asian equity markets which have declined anywhere from -6% (Germany and Japan) to -3% (China) and -12% (South Korea)[1].

Some of the disparity in returns is explained by a strengthening U.S. dollar, but much of the decline is tied to the dependency of many of these countries and regions on imported oil and natural gas to fuel their daily economies. If supply is limited on a global basis, prices for oil and natural gas will rise, which in turn can lead to higher inflation in their economies and slower economic growth.

Investors are right to be concerned about the conflict’s impact on oil and liquified natural gas (LNG) prices. Shipping of oil and LNG through the vital Strait of Hormuz has essentially stopped since the conflict started. In fact, it had slowed over the last few weeks and tensions escalated and the U.S. began positioning naval assets in the region in advance of the offensive. While Iran has been a marginal producer of oil due to sanctions, it has shut down shipping through attacks on some of the vessels that were in the Strait at the time. Close to 20% of seaborne oil and approximately 25% of LNG exports flow through the Strait each day. If no ships are moving through, there will be considerable supply constraints in these regions.[2]

U.S. Market Activity

U.S. equity markets have been less impacted due to the country’s limited dependency on imports. While the U.S. does import more oil than it exports, most of the imports come from Canada and Mexico, meaning that a supply cut off in the Middle East would have less impact on the U.S. supply sources, but would raise the price of the imports.  Since the start of the conflict, the benchmark U.S. oil price has risen about $7/barrel or approximately 10%.[3]

Rising oil prices, if sustained, will have inflationary impacts on the U.S. economy, which will weigh on GDP growth. This explains to some extent why U.S. Treasury yields have risen slightly, rather than falling as has historically been the case when geopolitical risks rise and assets flock to safe haven assets such as U.S. Treasuries.

Takeaways

So, what should be expected over the next few days and weeks if the conflict persists and oil supply is constrained?

• • First, oil prices will continue to rise, though expect other regions that produce oil to ramp up production to fill the supply gap if possible. Higher prices should incentivize higher supply.
  • Second, equity markets will experience higher levels of volatility as investors react to the latest developments in real-time. If the conflict persists longer than some expect, there may be noticeable impacts on corporate margins and earnings due to higher costs for energy and materials. If the conflict resolves in the short-term, volatility should subside and stock prices will be less influenced by geopolitical news.
  • Third, if energy prices rise higher and stay elevated, expect higher short-term inflation. This will likely limit any expected actions by the U.S. Fed to lower interest rates. U.S. Treasury yields will likely grind higher, though if the conflict escalates significantly, there could be a flight to safety trade which could offset the upward movement and result in lower yields.

Investment Team View

History has shown that investment markets can be spooked by geopolitical events in the short-term (think days to weeks) but over longer time periods (months to quarters), they tend to revert to the trends that were driving markets before the events unfolded. Of course, this is not guaranteed and there are many variables that could influence the direction of investment markets in the days and weeks ahead. However, investors who have evaluated the risks and made prudent decisions that align with their long-term investment goals and tolerances for risk have generally fared well following periods of stress in the markets. 

¹ ² ³ Source(s): Morningstar. All market performance data as of March 3, 2026.

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