Iran conflict update: a growing divide between markets and economics

Events have moved quickly, and markets have seen extended bouts of volatility. Our aim is to explain what has happened, how markets are responding, and why we continue to believe that a measured, long-term approach remains the correct course of action in this unpredictable geopolitical environment.

What has happened so far?

The US and Israel launched major strikes on Iranian targets at the end of February, killing Iran’s supreme leader and hitting military and nuclear sites. Iran retaliated with missile and drone attacks across the Middle East and declared the Strait of Hormuz effectively closed for the time being. This waterway is a critical artery for global energy supplies, carrying around a fifth of the world’s seaborne oil and liquefied natural gas shipments. As a result, energy prices have risen sharply since the initial attacks as supply disruption escalates.

Perhaps the most significant development for the global economy was the series of attacks on energy infrastructure, with Iran launching a series of strikes on critical oil and gas facilities across the Gulf. The most consequential attacks targeted Qatar, home to the world’s largest liquefied natural gas (LNG) export hub, in what regional governments are calling a direct assault on global energy stability.

As we approach the 100-day mark since the start of the current Middle East conflict, the situation remains fluid and opaque. While US President Donald Trump has described ongoing negotiations with Iran as progressing “very well”, Iranian officials have played down the outlook, indicating little tangible progress in recent days. 

A growing divide between market sentiment and economic reality

There have, however, been some tentative positives, including a ceasefire arrangement between Israel and Lebanon contingent on a halt to Hezbollah activity, and continued diplomatic efforts by Washington to broker a broader settlement. At the centre of these negotiations is not only the question of Iran’s nuclear programme, but also the reopening of the Strait of Hormuz, which remains effectively closed. 

This energy bottleneck is the key issue for markets. The disruption has sustained upward pressure on oil prices, reinforcing inflation risks at a time when central banks had been hoping to ease policy. As a result, investors are confronting a more uncertain outlook for interest rates, with interest rate rises instead of cuts expected by the market. At the same time, the reaction in equity markets has been impressive with US indices reaching new all-time highs, despite the backdrop of elevated geopolitical risk and a potential haircut to economic growth

Today’s market is more willing to look through geopolitical noise, even though the physical reality, such as constrained flows and energy pressures, has yet to fully resolve. This creates a disconnect: markets are trading the future, while risks remain embedded in the present. 

Looking ahead, the critical determinant will be the duration and intensity of the conflict. If tensions remain contained and progress is made towards reopening key energy routes, markets may normalise relatively quickly, as has often been the case following geopolitical shocks. However, a prolonged or escalating conflict – particularly one that continues to impair energy infrastructure or shipping – would pose a more significant risk, with implications for sustained inflationary pressure, tighter financial conditions and weaker global growth. 

Our view

From an investment perspective, this reinforces the importance of diversification and discipline. While short-term uncertainty is likely to persist, we believe long-term returns will continue to be driven by fundamentals such as earnings, economic growth and policy direction. We therefore remain focused on maintaining balanced portfolios, mindful of the risks posed by geopolitical developments, but also alert to the opportunities that periods of market dislocation can create.