Investment Strategy
Middle East tensions challenge investor confidence
Key takeaways:
- The Israel-Iran attacks have reintroduced geopolitical uncertainty, unsettling markets. However, both nations have so far avoided major escalation.
- Some anxiety seems to be easing; while oil prices surged on the news, stocks are showing more muted movements.
- Recent events don't alter our positive outlook. The economy continues to show strength, and historically, major geopolitical events rarely have a lasting impact on global, diversified stocks.
- Staying invested in a diversified, goals-aligned portfolio has been a reliable strategy. Investors can enhance resilience by allocating more broadly across regions, sectors like defence, and uncorrelated assets like gold, infrastructure, and hedge funds.
Heading into Friday, markets had rebounded from their April slump, with global stocks hitting record highs and the S&P 500 just 1.5% off its own peak.
Markets seemed to be getting comfortable with being uncomfortable, just as we anticipated in our Mid-Year Outlook. But as Friday dawned, a new geopolitical risk emerged: Israel-Iran attacks left investors on edge.
With fears mounting over a broader conflict, Friday saw Brent oil prices jump as much as 14% before halving the surge—marking the biggest intraday jump since March 2022. This rippled across other global markets, albeit less dramatically, with European and U.S. stocks falling over 1% on the day. Safe-haven assets like gold rallied, and the dollar edged higher; yet, Treasuries suffered as the oil spike stoked inflation concerns.
Historically, geopolitical events tend to have a limited impact on broad, global markets. As the week begins, markets are already reversing some of Friday's risk-off moves. Still, the potential for a larger impact deserves attention. Below, we explore how the Middle East conflict might challenge our outlook and offer our thoughts on why we believe the economy and markets can weather this geopolitical shock over the medium term.
What we know so far
On Thursday night, Israel launched attacks on Iran's nuclear and military facilities. Iran retaliated the next day, and over the weekend, both nations exchanged strikes, resulting in mutual casualties, including top Iranian military leaders. As the conflict enters its fourth day, both sides have notably avoided extreme escalation. Iran has steered clear of U.S. facilities in the region, and Israel has refrained from targeting Iran's oil production and shipping facilities, focusing instead on other energy infrastructure.
The U.S. quickly distanced itself, denying any involvement. President Trump hinted at possible intervention if attacks continue, while Saturday's planned nuclear deal talks between the U.S. and Iran were cancelled.
What we’re watching
The nature of the response from here will be telling. The conflict could escalate into one with a larger macro and market footprint.
To gauge the impact, we're closely monitoring: 1) the impact on natural resources, 2) the effect on the economy, particularly inflation, and 3) the follow-through into price action.
1. The impact on natural resources
Iran is a smaller yet still significant oil supplier, contributing about 4% of global production, with China buying 90% of its exports. For comparison, Russia's share of global production was nearly three times larger when it began its war with Ukraine, with far more developed economies dependent on those imports.
The greater risk lies in conflict spillover to the broader region or key transit routes like the Strait of Hormuz, the critical choke point for around 20% of global crude oil. A blockade of the strait—which would be unprecedented—could put 21 million barrels a day at risk. Regional players taking sides could further complicate the energy supply picture, as the Middle East accounts for roughly a third of global oil production.
Oil prices remain low relative to 2022 levels
Brent crude oil, $ per barrel
Source: Bloomberg Finance L.P. Data as of June 16, 2025. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
2. The effect on the economy (especially inflation)
Higher energy prices could, in turn, disrupt sentiment, spending, and investment. That makes the energy supply chain crucial to monitor, and it seems better equipped to absorb shocks than in decades past. A significant disruption would likely lead oil producers to ramp up supply, with OPEC+ holding spare capacity and U.S. production demonstrating flexibility in recent years, thanks to the shale fracking boom.
The impact on the growth-inflation mix could challenge central bankers, making this week's meetings from the Bank of Japan, Federal Reserve, and Bank of England especially notable.
3. The price action
Geopolitical tensions have rattled markets, but as Monday trading begins, some anxiety seems to be easing.
Markets nearest the event are showing the most caution. Oil prices are holding at last week's highs of $74 per barrel, while Middle Eastern stocks faced sharp declines. Meanwhile, other stock and currency markets saw milder fluctuations, with some even posting gains as this week begins.
That aligns with our recent historical analysis of major geopolitical events, which finds that such events can significantly impact local markets but often don't leave a lasting mark on global, diversified stocks.
For global investors, business cycles usually matter more. Significant escalations that threaten economic disruption—like the risks we outlined above—can have a bigger impact. The notable example: the 1973 Arab-Israeli War, where the OPEC oil embargo led to a spike in oil prices, fueled inflation, triggered a recession, and led to a prolonged stock market slump.
But so far, there's no evidence of similar actions being taken today; economies are actively pursuing greater energy independence and diversification; and the current signs point to a resilient economy poised to expand despite geopolitical risks.
The impact of geopolitics on markets tends to be short-lived
S&P 500 around military invasions and conflicts, month of event = 100
Sources: J.P. Morgan Asset Management – Eye on the Market (July 2014 edition), Bloomberg Finance L.P. Data is as of October 2023. S&P 500 Index represents price returns. Events include: Korean War (1950), Soviets into Hungary (1956), Six-Day War (1967), Soviets into Afghanistan (1979), Martial Law in Poland (1981), Falklands War (1982), U.S. invades Grenada (1983), U.S. invades Kuwait (1991), Serbians into Kosovo (1998) U.S. invades Iraq (2003), N. Korea sinks S. Korean Navy vessel (2010), Fall of Mosul to Islamic State (2014), Russia invades Ukraine (2022). Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Why we’re comfortable with our view
With uncertainty high, it can help to focus on fundamentals. Three indicators from the past week suggest that the economy and markets have the resilience to power through geopolitical challenges.
1. Inflation is trending down
The bigger picture reveals easing price pressures globally, despite tariffs. Last week, both the U.S. Consumer Price Index and Producer Price Index rose just 0.1% month-over-month, slower than expected. If consumers were bearing the brunt of tariffs, we'd likely see it in the inflation data. Meanwhile, quality businesses in the U.S., Europe, and Japan might be absorbing the impact, as strong profit margins help stave off price hikes.
While tariffs could potentially drive some inflation later in the summer, the minimal impact from added levies so far is encouraging. Although a spike in oil prices from geopolitical tensions could pose a greater threat, especially if recent events escalate, it's notable that oil prices remain 10% below January's highs, even with the recent surge.
2. Tariff talk is focused on cutting deals
Following U.S.-China talks in London, President Donald Trump announced a completed trade framework with China. Key elements include China's commitment to expedite shipments of rare earths vital for U.S. auto and defence industries, and Washington's easing of Chinese student visas and some export controls, though restrictions on advanced chips persist.
Make no mistake, though, tariff discussions are far from over. Global tariffs will remain in effect as courts debate their legality, and Trump also warned that reciprocal tariff letters will be sent to countries within the next 1-2 weeks. Still, we're encouraged by the overall direction of trade talks, which are leaning towards deal-making.
3. The bond market has stopped selling off
After climbing about 40 basis points over the past two months, 10-year Treasury yields dropped by 10 basis points last week, despite a wobble following Friday's geopolitical news. Strong demand at U.S. Treasury auctions is helping the bond market find solid footing, and there's little concrete evidence of capital flight from U.S. assets at this time.
What it means for you: portfolio resilience
We continue to stress the importance of preparing for geopolitical threats—a focus highlighted by our CEO, Jamie Dimon, in his latest shareholder letter. Economies are already adjusting supply chains and increasing defence spending to enhance security. With uncertainty prevalent, markets are likely to face ongoing tests, with volatility persisting through the summer and beyond.
History shows that maintaining a diversified, goals-aligned portfolio has been a reliable strategy through countless geopolitical crises, wars, pandemics, and recessions—and we believe this will remain true. Recent events don't alter our constructive outlook; the economy continues to demonstrate strength. We still advocate for normal risk levels in multi-asset portfolios, and investors can enhance resilience through diversification across regions, sectors like defence, and uncorrelated assets such as gold, infrastructure, and hedge funds.
Reach out to your J.P. Morgan team to discuss how your portfolio can build resilience to geopolitical risk.
KEY RISKS
All market and economic data as of June 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
Important Information
Markets brace for impact, yet positive economic signs and historical analogies suggest the recovery could continue.
Madison Faller
Global Investment Strategist
Matthew Landon
Global Investment Strategist
Published Jun 16, 2025
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