Economic Commentary

The U.S./Israeli strikes on Iran have materially altered expectations for 2026. Coming into the year, investors expected a solid combination of decelerating inflation, interest rate cuts, strong corporate earnings growth and low risk of recession. Rapidly rising energy prices have introduced a new layer of complexity for investors to navigate.

Geopolitical Shocks

Since the February 28, 2026 military strikes on Iran, global financial markets have been locked in a cycle of high-sensitivity trading, where daily performance is largely dictated by the latest geopolitical headlines. As an example, reports of high-level ceasefire talks announced on March 23 led to a significant relief rally and a 10% drop in Brent crude, only for those gains to be reversed by subsequent denials from Tehran and continued strikes on strategic targets. The constant flow of breaking news, ranging from leadership changes in Iran to shifts in U.S. tactical ultimatums, has prevented a stable risk premium from being established.

The stakes are not simply geopolitical headlines; the conflict is disrupting marine transit through the Strait of Hormuz, one of the world’s most critical energy arteries through which roughly 20% of global oil and liquefied natural gas (LNG) normally flows. The Strait is in a state of de facto closure as Iran has struck 21 commercial vessels as of this writing and threatened to mine the Strait to prevent tanker traffic through the Persian Gulf.

Threats to physical infrastructure create another risk to global energy markets. In mid-March, Iran struck Qatar’s Ras Laffan natural gas infrastructure, which sidelined approximately 3.4% of global LNG capacity.

Energy prices have risen significantly. Coming into the conflict, oil and gas markets were well-supplied. Brent crude oil was priced around $70/barrel. It closed the first quarter at $118/barrel. Dutch natural gas was 32EUR/Mwh, it closed the first quarter at 50EUR/Mwh. In the U.S., the average price of a gallon of regular unleaded gasoline was $2.98, today it is $4.06. For energy-importing economies in Europe and Asia, this has potential to be not just a short-term price spike but a multi-year structural shift; with petroleum and natural gas company QatarEnergy warning that some capacity could remain offline for three to five years. The market appears to now be pricing in higher-for-longer energy prices, eschewing the notion of a near-term return to stability.

Changing Expectations

Although this conflict has only persisted one month so far, expectations have changed meaningfully over that time.

2-year inflation breakevens rose from 2.82% to 3.22% in TIPS markets.
Federal Funds Rate expectations changed from 2 cuts in 2026 to 0.
Prediction market odds of a recession before 2027 moved from 21% to 32%.
One bright spot has been earnings expectations. CY 2026 S&P500 earnings expectations have gone from $315.36/sh (15% growth) to $320.46/sh (17% growth).

Stagflationary energy shocks are challenging for investment markets as they tend to negatively impact stocks and bonds at the same time. That has been the case with this shock as well. In March, the market impact was:

U.S. Large Cap: -5.0%
U.S. Mid Cap: -5.4%
U.S. Small Cap: -4.1%
Developed International: -10.3%
Emerging Markets: -13.1%
Core Bonds: -1.3%

The future path of the conflict, particularly opening the Strait of Hormuz and defending energy infrastructure, will determine if there is a rapid recovery or continued pressure across traditional asset classes.

Economic Update

On the economic front, recent data presents a picture of a resilient but cooling system. February inflation met expectations for the month, remaining at the lowest levels since May 2025. Core inflation, which excludes the volatile food and energy prices, also met analyst expectations and was near its lowest level since 2021. The longer the Strait of Hormuz remains a contested zone, the greater the potential impact on future CPI readings due to global energy prices.

The labor market, meanwhile, has shown mixed signals. The most recent jobs report was somewhat weak, but initial unemployment claims data has remained solid. The low-hiring, low-firing jobs market appears to be continuing.

While this cooling is exactly what the Federal Reserve looks for to justify a shift in policy, it also underscores the fragility of the current expansion. In their March meeting, the Fed kept rates steady, opting for a wait-and-see approach as they weigh the potential for an energy-driven inflation spike against the risk of a labor market stall.

GDP growth for the fourth quarter of 2025 was revised down from 1.4% to a 0.7% annual rate. Much of this drag can be attributed to the 43-day government shutdown late last year, which delayed federal spending and temporarily reduced consumer activity. The fourth quarter’s 0.7% figure falls far behind the 4.4% growth seen in Q3 2025 and is a reminder that policy friction has real-world consequences.

Maintaining a Long-Term Perspective

The temptation in volatile markets is to react to every headline. However, history demonstrates that maintaining discipline during volatile times is essential to achieving long-term results. By distinguishing temporary headline noise from permanent structural shifts, we can remain positioned to withstand these current pressures without losing sight of our ultimate objectives. On behalf of our entire investment research team, thank you for your continued trust. We will continue to monitor these developments closely as we navigate the remainder of 2026.