Iran Conflict Continues to Pressure Markets as Oil Surges and Growth Risks Rise

How is this impacting markets going forward?

Sustained oil prices above $100 would shift the impact from a volatility event to a growth consideration.

At current levels, the drag on U.S. growth is estimated at approximately 0.5 percentage points. The impact is likely more pronounced outside the United States — particularly in Asia — where roughly 80–90% of crude and LNG transiting the Strait of Hormuz flows. In that context, growth risks have moved up from low to medium.

The ongoing conflict involving Iran and the disruption to energy markets has moved beyond headline risk and is now influencing expectations for growth, inflation and policy. As of March 9, oil prices briefly breached the $100 per barrel threshold — a development that shifts the macro conversation compared to last week.

What happened in the first week of the conflict?

During the first week, energy markets absorbed the most visible impact. Crude oil briefly rose above $100 per barrel amid continued uncertainty surrounding flows through the Strait of Hormuz — a critical corridor for global crude and liquid natural gas (LNG) shipments.

Leadership dynamics inside Iran have also evolved. The country’s newly announced leader, Mojtaba Khamenei, is widely viewed as a hard-liner and seen as potentially extending the conflict, suggesting the risk of a protracted disruption to energy supplies has increased.

Our measure of investor sentiment moved from overbought to directionally slightly pessimistic last Friday for the first time since November. Even so, current conditions do not reflect panic or forced repositioning. Overnight selling pressure eased somewhat following reports that Saudi Arabia may offer additional crude supply via the Red Sea, though uncertainty around energy flows remains elevated.

How is this impacting markets going forward?

Sustained oil prices above $100 would shift the impact from a volatility event to a growth consideration.

At current levels, the drag on U.S. growth is estimated at approximately 0.5 percentage points. The impact is likely more pronounced outside the United States — particularly in Asia — where roughly 80–90% of crude and LNG transiting the Strait of Hormuz flows. In that context, growth risks have moved up from low to medium.

Elevated energy prices also introduce renewed upside risks to inflation. That dynamic limits central bank flexibility. The Federal Reserve (Fed) is unlikely to come in proactively with rate cuts, similar to its approach during the April 2025 drawdown. We think policymakers would need to be convinced of imminent risks to growth before easing, especially given the possibility of a more sustained inflation overshoot.

Markets, therefore, face a backdrop of higher energy costs and limited monetary policy support. While investor sentiment has softened, it has not reached levels historically associated with systemic stress.

Updates to our positioning

At this time, we remain close to our strategic asset allocation targets. While growth risks have increased with oil near $100, the current environment does not show signs of disorderly market functioning. The key variable remains the duration of the conflict. If oil prices stabilize, the macro drag is likely manageable. If higher prices persist, the cumulative growth impact would become more significant, particularly in non-U.S. markets.

At this stage, we believe maintaining discipline while preserving tactical flexibility remains the most appropriate course.

High-level scenarios

• Base case
  Oil prices remain elevated but do not move materially higher, and disruption through the Strait of Hormuz is not sustained at levels that severely impair global supply. Growth slows, inflation risks linger, and markets remain volatile but contained.
  
  
• Bull case
  Supply channels stabilize — including incremental output and rerouting — allowing oil prices to moderate. Growth concerns ease and sentiment improves.
  
  
• Bear case
  Disruption persists and oil remains well above $100 for an extended period. The resulting energy shock leads to a more significant global slowdown, with Asia particularly exposed given its reliance on Hormuz flows. Inflation pressures intensify, limiting policy flexibility and weighing further on markets.

Regional watchpoints

• North America: Estimated 0.5 percentage-point growth drag at current oil levels.
  
  
• EMEA: Sensitive to both crude oil and natural gas disruptions from the Middle East with sustained inflation pressure and external demand effects weighing on the outlook.
  
  
• APAC: Most exposed given concentration of energy flows through the Strait of Hormuz.

Manager perspectives

As of March 6, we surveyed managers through the initial week of the conflict. Across 30 manager research reports, the prevailing view remains that disruption is likely to be contained, though risks have risen alongside oil prices.

Managers consistently emphasize the importance of the duration of energy disruption, Asia’s exposure to Hormuz flows and the constraint on central banks given renewed inflation risks. While caution has increased, managers do not characterize current conditions as panicked.

Chart 1: Scenarios

Chart 2: Investment implications by asset class (base vs. tail)

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