The US-Israeli war on Iran, now in its fourth week, is generating real economic turbulence. Global oil prices have surged more than 25 percent, roughly a fifth of global crude and natural gas supply has been suspended, and tanker traffic through the Strait of Hormuz has effectively stalled. Brent crude recently rose to $108.66 a barrel following an Israeli strike on Iran’s South Pars gas field.
The monetary policy response is equally complicated. The Federal Reserve left interest rates unchanged for a second straight meeting, ignoring President Trump’s demands for cuts as rising oil prices threaten to reignite inflation. Markets had previously priced in two rate reductions this year, but expectations have been pushed down to at most one cut in 2026. Fed Chairman Powell used the phrase “we don’t know” at least 14 times at his press conference.
The impulse to react, sell, and take shelter is understandable. It is also, historically, a mistake. According to LPL Research’s analysis of geopolitical events since World War II, the S&P 500 has experienced an average decline of roughly 5 percent following geopolitical shocks, with markets typically bottoming in about three weeks and recovering within one to two months. Stocks generated positive performance one year after an act of aggression in 73 percent of armed conflicts since World War II. The key variable is not the conflict itself, but whether it coincides with or causes a recession.
In 20 major post-World War II military interventions evaluated by RBC, the S&P 500 fell six percent on average from initial impact to trough, yet in 19 of those 20 events, the market returned to pre-event levels in an average of just 28 days, regardless of how long the conflict itself lasted.
The 1973 Arab oil embargo deserves honest treatment. It kicked off a lengthy recession and an inflation surge that wasn’t fully arrested for years, and the S&P 500 took six painful years to recover. That remains the cautionary scenario. The current conflict isn’t there yet, but investors would be wrong to dismiss the comparison entirely. Oxford Economics describes the Iran war as a “stagflationary shock,” one that can weaken growth and stoke inflation simultaneously, though the US economy is far stronger than it was in the 1970s. As J.P. Morgan’s Joseph Lupton noted, this conflict “generates greater macroeconomic risk than recent military conflicts” through its potential to disrupt global energy markets and supply chains. That is not a reason to panic. It is a reason to be clear-eyed.
Conflict disrupts broad markets but concentrates opportunity in specific sectors. On defence, rising tensions are supporting defence companies as governments worldwide increase military spending and rebuild stockpiles, with priorities shifting toward AI-enabled platforms, cyber capabilities, and missile defence. That said, investors should be selective about timing, because the worst time to buy defence stocks is when conflicts dominate the news and shares are spiking.
On energy, oil majors have outperformed on stronger earnings, and large-cap energy companies offer a case for defensive allocation. Much of the corporate upside, in both defence and energy, sits in US-listed companies, one reason American markets have held up better than Asian peers.
On gold, prices have surged above $5,400 per ounce. Gold benefits from both safe-haven inflows and its role as an inflation hedge when oil rises on supply fears. However, J.P. Morgan’s Gregory Shearer notes that gold’s risk-premium boost during past MENA conflicts has ultimately proved fleeting.
On cybersecurity, digital attacks increase during conflicts, making this sector increasingly valuable to both governments and corporations.
Sun Tzu’s core insight was that conflict is won through preparation, discipline, and controlling one’s own reactions. The same applies to investing under pressure.
Know yourself before you act and assess whether your risk tolerance genuinely matches your current allocation. Don’t chase what you don’t understand; repositioning into conflict beneficiaries at the moment of maximum news coverage is momentum chasing, not strategy. Maintain liquidity and avoid being a forced seller. Investors destroyed by geopolitical shocks are typically those who sold at lows and missed the recovery. Stay flexible as conditions change, because the range of outcomes remains wide, and humility about what is knowable is itself a form of risk management.
As Fidelity’s Denise Chisholm noted, “geopolitical crises have had political and humanitarian consequences, but not long-term economic and financial ones.” That is the base case, not a guarantee. The task is to stay analytical and let a coherent long-term plan do the work that short-term noise never can.
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