The U.S. and Israel strike Iran: what it could mean for markets

U.S. President Trump stated that "the U.S. military began major combat operations in Iran" with an objective to eliminate "imminent threats from the Iranian regime." Late Friday some reports cited a possible breakthrough in the recent ongoing negotiations. However, this weekend the U.S. has ultimately put into action some of the resources of the largest military buildup the region has seen in decades. News reports indicated the operation may go on for several days, with the U.S. also urging Iranians to try to achieve governmental change.

Even before the new military action and Iran’s retaliation, markets were already somewhat on edge, with oil recently pushing above $72 a barrel. And gold – despite some heightened volatility lately – has been rallying back towards $5,300 an ounce. Investors are weighing not only U.S–Iran tensions but a broader set of geopolitical flashpoints this year, from Denmark and Greenland to Venezuela and Ukraine.

It remains to be seen if events escalate to the point that could ignite a major energy crisis. But the risk of escalation remains, and with it, real human consequences.

For investors, the ripple effects could reach across the global economy and financial system. Energy is central to these risks, with the Middle East serving as a critical hub for global oil and gas flows. Even the possibility of disruption can quickly affect production costs, consumer prices, monetary policy expectations, market sentiment, and the broader outlook for growth and inflation.

Our constructive outlook for the year stands, but these events reinforce the reality of a fragmenting global order. Now more than ever, portfolios should be built for resilience—with gold, alternatives, and exposure to sectors governments consider strategically vital.

Here’s what we’re watching, why it matters, and what it could mean.

What we’re monitoring: Energy at the epicenter

Prediction markets had already been signaling elevated risk, pricing a rising expectation of U.S. military action in Iran by March in recent weeks (some measures reaching nearly 70% on Friday). Now, the key question is how the escalation will be managed.

Importantly, oil markets are not without defenses. Supply is currently outpacing demand, leading to inventory builds that provide some buffer. Moreover, OPEC+ is capable of adding production if needed, governments have emergency reserves, U.S. producers have demonstrated flexibility in responding to price changes, and shipping and logistics have proven resilient through a number of recent challenges, from geopolitics to pandemic disruptions. Even so, the situation remains fragile. If things escalate further, two potential scenarios look particularly consequential: a broader regional conflict—especially one that threatens the Strait of Hormuz—or internal destabilization within Iran. Either could trigger supply shocks, drive oil prices higher, and have a more dramatic impact on the global economy and financial markets.

1) Broader regional escalation

While Iran supplies a notable 3% of global oil, the real strategic risk centers on the Strait of Hormuz, a chokepoint for roughly 20% of the world’s oil and liquified natural gas (LNG) trade, where Iran holds considerable influence. Some headlines now suggest Iran is not allowing ships to pass through the strait, but the situation remains fluid. It's worth noting that Iran has repeatedly threatened to close the strait, but it has never followed through, likely given the fact that it relies on the same route for its own exports.

We estimate that a full closure could push oil prices above $100 per barrel. Less likely, such a scenario would be a strong headwind, but manageable if the disruption is brief. The longer it lasts, the greater the impact: while the U.S. economy may still avoid recession, it could face a 1.0-1.5% shock to inflation and a similar hit to overall GDP growth if the oil spike is sustained.

But given the severe damage it would inflict on Iran’s own economy, we think a full closure remains unlikely. It’s also worth noting that markets tend to distinguish between rhetoric and reality. When Iran signaled it might close the strait in 2011–12, stock markets managed to rally, reflecting skepticism that a closure would materialize.

Still, limited disruptions, such as increased naval activity or higher insurance and freight costs, could inject volatility into oil markets and risk assets. Proxy attacks on shipping in the Red Sea in recent years have highlighted the vulnerability of other key chokepoints and global trade routes. Adding another layer, U.S. efforts to contain the situation could be complicated by other major players with a vested interest. China, the leading importer of Iranian oil, could exert trade leverage over the U.S. through its control of much of the world’s rare earths—materials deemed vital to U.S. national security.

2) Internal destabilization and regime change

If military action fractures Iran’s regime or security forces, the fallout would be meaningful.

History offers some guidance: our investment bank finds that since 1979, regime changes in oil-producing countries have driven oil prices up by an average of 30%—and in extreme cases, as much as 76%. The 1978–1979 Iranian Revolution more than doubled oil prices and triggered a global recession. Even now, Iran’s crude output remains well below pre-revolution levels, underscoring the lasting impact.

A similar shock today could push oil into the mid-$80s. Again, the duration of the price spike is key. If it’s sustained, we estimate it could mean a 0.8% increase in U.S. inflation and a comparable drag on growth. Such a move would likely spark a selloff in global stock markets, similar to drawdowns seen during the Gulf War and the Russian invasion of Ukraine. While painful, it’s worth remembering the average year (in any calendar year) sees an S&P 500 drawdown of 14.5%. Defensive stocks and energy equities could rally under this scenario.

All that said, unlike recent actions in Venezuela, given how Iran’s government and security forces are deeply entrenched - any regime change would take quite a lot to happen, and that possibility remains unclear.

The bottom line

Our positive outlook for the year remains intact, supported by our historical analysis showing that, unless there’s a major economic disruption, volatility from geopolitical events tends to be short-lived.

Concerns about escalation are valid. Yet, through countless crises, wars, pandemics, and recessions, investors who have stayed the course have recouped losses and benefited from growth, innovation, and progress. While we do not view a worst-case, escalatory scenario as our base case, selectively enhancing portfolio resilience—through assets such as gold, alternatives like hedge funds, volatility-aware strategies like structured notes, or investing alongside strategically important sectors—can help manage near-term uncertainty.