Where we stand one week into the war

The war in the Middle East has roiled global markets this week, although the impact has been uneven across asset classes. As we look ahead, it’s too early to say how much of an impact we’re likely to see, or whether we’re closer to the beginning or the end. Needless to say, we’re hopeful for a resolution in the near term and are thinking of those in harm’s way.

Energy has, as one would expect, seen the greatest impact, with one-fifth of the world’s oil and gas supplies flowing through the Strait of Hormuz, where traffic has dropped to a standstill in the past few days. Brent crude has risen over 25% this week and is up over 50% year-to-date. Despite volatility in equities, stocks have weathered the news decently well. Gold initially rose on the news but gave back those gains later in the week. The dollar has benefited slightly, rising 1.3% this week as investors have looked for safety. Despite the flows into dollar-based assets, US Treasury bonds have sold off slightly across various maturities. That has been driven by rising inflation expectations—higher oil prices have driven expectations for inflation over the next two years up by 30 bps this week. Finally, the market’s fear index, the VIX, came into the year at a very normal level of 15. As geopolitical concerns emerged, that rose to around 20, and it’s ending the week at around 30.

What happens from here will depend on events on the ground in Iran, but also on the rest of the economic trends already in place coming into this conflict. Should the situation worsen and more oil production come offline, or more oil infrastructure be damaged by attacks, oil could rise further from here. Should a resolution come into focus, the stresses in the oil market could ease, with the economic and market risks coming with them.

In the background, we remain focused on other critical trends:

• Strong baseline economic growth in the US, driven by AI-related buildouts, improving consumer sentiment and economic stability, and potentially by AI-related productivity enhancement
• Tax refunds are trending higher than they have in recent years, with a significant step-up in payments over the past week—this stimulus forms part of our baseline expectation of US economic strength
• The Fed’s cutting cycle and the balance the FOMC is aiming to strike in the labor market and inflation, with a noisy backdrop from demographic and labor force changes affecting the former and tariffs and the conflict in Iran affecting the latter
• Growth in China, which is slowing compared to its longer-term trend, but remains higher than expected in developed markets
• Negative headlines in alternative credit markets, which are often painted with the same brush, but each of which has been tied to distinct categories of issues in distinct sub-classes of the credit markets

In our 2026 outlook, we wrote about how the range of economic outcomes had narrowed over the course of 2025, leading to an economy on clearer footing entering 2026. Recent events have widened that range again slightly, but remain less impactful than what was potentially in store around a year ago. Considering the situation in Iran today, we’re probably at or just past the point where the range of outcomes is widest—in the next few weeks, we’ll have a better sense of which path we’re going down.