The U.S. war with Iran is now in its sixth month, and market participants continue to focus on the Strait of Hormuz gridlock as the nexus for the conflict’s impact on oil prices and the stock market.
Now, however, markets have seen ebbs and flows in the conflict, and the many attempts at diplomacy haven’t resulted in a permanent end to hostilities or a large escalation.
Oil prices continue to be the key way the conflict is affecting stock markets and consumers, through their effect on energy prices for people and businesses and the Federal Reserve’s efforts to tame inflation.
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But after a spike to nearly $120 a barrel, international oil prices have pulled back to the high-$80s. That’s well above pre-war levels, but hardly high enough to cause major problems for the global economy.
Meanwhile, the stock market, as measured by the S&P 500, is at record highs, more than climbing out of a dip that lasted for the first month of the war.
There is a growing consensus among experts that the conflict may continue as it has for some time, but that it isn’t likely to be enough to derail the economy, tank the stock market or cause oil prices to skyrocket unmanageably.
All of that is good news for long-term investors who want to hold on to a diversified portfolio of stocks and bonds for the foreseeable future instead of trying to trade on the daily ups and downs of geopolitical expectations.
— Oil prices, the stock market and inflation.
— What will happen with stocks and oil prices?
— Volatility as an opportunity.
— How long-term investors can position themselves.
Oil Prices, the Stock Market and Inflation
Before the conflict, the Strait of Hormuz — a narrow body of water between Iran’s coast to the north and Oman’s to the south that links the Persian Gulf to the world’s oceangoing energy trade — handled about 20% of the globe’s oil traffic, as well as significant chunks of other commodities, including liquefied natural gas and aluminum.
Iran has used that to its advantage by effectively blockading the strait with attacks on vessels and threatening additional maritime violence.
But international oil prices have been kept in check because the world is well supplied, nations have released emergency inventories, economic headwinds in China curtailed its oil imports, non-gulf producers increased output and alternative pipeline shipments have been put to use.
Still, the initial spike in oil prices has had an effect on inflation, even though it hasn’t been enough to derail global economic growth altogether.
“The primary transmission channel from events in the Middle East to financial markets is through energy prices and inflation expectations,” says Angelo Kourkafas, senior global investment strategist at Edward Jones.
A second-quarter increase in inflation was largely driven by energy prices, he points out. But that should gradually ease if the recent oil shock continues to fade. In addition to lower oil prices, housing-related inflation pressures continue to cool, and wage growth is becoming less inflationary when adjusted for productivity gains, Kourkafas says.
“Taken together, and absent a significant escalation in the conflict, we expect inflation to continue moderating through the second half of the year and into 2027,” Kourkafas says. “The conflict could contribute to interest rates and bond yields remaining higher for longer, but as long as economic and corporate fundamentals remain supportive, stock market performance is likely to be driven primarily by earnings growth.”
What Will Happen With Stocks and Oil Prices?
Crit Thomas, global market strategist at Touchstone Investments, says a meaningful impact on stocks and oil prices is a low probability.
While a disruption of shipments through the strait through the end of the year could push oil prices much higher, increase inflation pressures, keep interest rates elevated, and weigh on both stocks and bonds, that doesn’t seem likely, he says. Recent strait-related talks between Iran and Oman are encouraging, and the U.S. doesn’t seem interested in significant military escalation.
However, an escalation that involves troop deployment would be viewed as a major negative by stock and bond markets and lead to higher oil prices and interest rates, says Steve Wyett, chief investment strategist at BOK Financial.
But that is a worst-case scenario, not BOK’s base case, as Wyett expects that Washington is under pressure to find an off-ramp as midterm elections approach.
“Absent this conflict, the world is well supplied, even oversupplied, with oil,” he adds. “This is a distribution issue, not a supply issue, and as such, the impacts to inflation and economic growth are being viewed as temporary.”
Market Volatility as an Opportunity
Edward Jones’ base-case expectation is that the Iran conflict, like other geopolitical flare-ups that have sparked short-term volatility, will end up producing limited and temporary market impacts.
Historical patterns and today’s market fundamentals, including a broadening of leadership outside of mega-cap tech stocks, offer reassurance and reinforce the importance of diversification across sectors, investing styles and regions, Kourkafas says.
“We would view any volatility driven by geopolitical developments as an opportunity to rebalance portfolios or deploy fresh capital, rather than a reason to abandon a long-term investment plan,” he says.
Wyett agrees that volatility can offer opportunities for investors.
“The good news is that past periods of geopolitical risks have been better investing opportunities than reasons to sell,” he says. “The key is to have a portfolio with a level of risk with which you can take shocks, like the Iran conflict, and be able to stay the course or, even better, be able to view periods like this as opportunities.”
How Long-Term Investors Can Position Themselves
Mark Barmak Besharaty, the founder of the Center for Iranian Prosperity, Holdings, Economics and Stability, an Iran-focused economic policy center, estimates the conflict will continue escalating and de-escalating through the end of the year, and oil prices and related commodities will continue fluctuating.
But inflationary pressures on consumers and businesses will continue even if the conflict is fully resolved in short order because of damage to oil and natural gas inventories and production facilities.
Commodity Investments
“Investors may want to review their positions related to these inflationary effects,” he says. “Businesses in commodity-related industries may offer a viable counter-balance to this trend.” Commodity industries to consider include agricultural fertilizer producers, and refining- and processing-related companies such as those involved in oil, LNG, copper and aluminum, he says.
Defense Stocks
Defense-related companies may also benefit from inventory replenishment spending.
“As the conflicts in the Persian Gulf and the Russia-Ukraine war continue to drag out, global supplies of military hardware are dwindling at a rapid pace,” Besharaty says. “As such, companies in this sector may continue to outperform if these conflicts continue on the same trajectory.”
Energy Investments
While the energy sector probably has the most direct exposure to the volatility from the Iran conflict, energy will continue to be in demand beyond that because of the power needs of the artificial intelligence boom, Wyett says.
“Beyond energy, we think sentiment and trends in AI will continue to be front and center for investors,” Kourkafas says.
Diversified AI Stocks
“Investors should maintain exposure to AI allocations but complement it with more diversified and differentiated sources of return,” he adds. “For AI exposure, we like communication services and emerging-market equities, while we expect rotations both within and beyond tech.”
The Bottom Line
However investors choose to position themselves, it’s a good idea to diversify and play the long game rather than trying to anticipate, or worse, chase sources of volatility like the Iran conflict.
“Short-term volatility is inevitable,” Thomas says. “Letting that short-term volatility influence long-term positioning decisions has generally led to poor outcomes. The question isn’t where will the market be in six months, it is where will it be in 10 years.”
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Iran War: How the Strait of Hormuz Gridlock Affects Stocks, Oil Prices originally appeared on usnews.com
Update 08/11/26: This story was published at an earlier date and has been updated with new information.
