US enters Israel-Iran conflict

What happened

Early Sunday morning local time, the US attacked three Iranian nuclear sites in an escalation of the Israel-Iran conflict that began on June 13. President Trump said the strikes destroyed Iran’s nuclear facilities at Fordo, Natanz, and Isfahan, though independent confirmation on the extent of the damage wasn’t available by Monday morning. While global leaders gathered at the UN Security Council Sunday advocating caution and negotiation, the world awaited Iran’s response. We believe this latest chapter will not be the last and that further phases should be expected. The signaling from that next phase (i.e. escalation or de-escalation) will be the focus of markets. The loss of life in any conflict is unfortunate and heartbreaking, but we focus only on the economic and market implications below.   

Market reaction 

Not surprisingly, market reaction was most obvious in energy markets. Brent crude oil was trading up 1% to $78/barrel as of 7AM ET. The move higher in oil adds to the increase in Brent levels this month–up ~25%–in large part due to the Middle East unrest. Outside oil, the reaction was muted—equity futures, Treasury yields and the US Dollar were all flat. We believe these limited moves reflect the market’s belief that Iran’s response will be more symbolic than economic and unlikely to materially impact energy sources in the region or result in a drawn-out conflict involving the US. 

What to watch

From a market perspective, what will matter most to investors is the price of oil. Looking back at previous Mideast conflicts, oil tends to take two paths in the wake of conflict escalation: 1) short-lived spike or 2) sustained elevation. The former tends to occur most often and is ultimately economically benign while the latter can present headwinds to the global economy given the cost increase it inflicts on businesses and consumers. Keep in mind, however, that not all countries have equal sensitivity to higher oil prices. The US, for example, given its large domestic production is less sensitive than many, including Europe and China. Ultimately, the length of time at higher prices (and how much higher) matters. The price of oil was between $75–$100/barrel for most of the last 3.5 years, so we need to keep the current post-spike levels in recent context.  

What’s a worst case scenario for oil, and thus the global economy? A sustained closure of the Strait of Hormuz by Iran would disrupt oil supply and lead to a meaningful increase in prices, we estimate at greater than 20% or $90+/barrel. The Strait is a narrow waterway connecting the Persian Gulf to the Gulf of Oman and roughly 20% of oil supply passes through the Strait, so markets are particularly sensitive to any news involving disruption. Following the US attacks, the Iranian Parliament voted to close the Strait but any final decision to take action rests with the Supreme National Security Council and leader Ayatollah Ali Khamenei.  

Economic resilience

It should be noted that the US economy has been running at a fairly solid pace thus far in 2025. Even amid tariff and geopolitical uncertainty, the unemployment rate is still only at ~4%, inflation has moved down toward 3%, while consumer spending and corporate profit growth have both been better than expected. We highlight this to reiterate a theme that has played out since mid-April: that economic momentum can help stabilize an economy when it is faced with an exogenous headwind (e.g., tariff uncertainty and now Mideast conflict). While we don’t want to suggest the economy is immune to all negative influences, economic starting points matter. 

What to do

We always say, and please excuse us for being repetitive, but crises are terrible times to make major asset allocation changes. Given that, and the historical precedents regarding markets and conflict, we’d advise our clients to stand pat with their current allocations. Historically, looking at select conflicts over 40+ years, the S&P 500 was higher by 2% a month after outbreak and 7% one year later. 

To be sure, we can't side-step market downturns,  nor is past market behavior and performance ever guaranteed in the future, but a well-diversified portfolio can blunt the impact and, importantly, keep the investor from needing to decide when the market’s “white flag” has been waved. We’ll continue to monitor the situation as events develop.