Opinion: Market implications from the US and Israel-Iran war

David Richards

Geopolitical tensions have intensified following coordinated U.S.-Israeli strikes on Iranian military and political targets that began Feb. 28.

These actions mark a significant escalation after weeks of military buildup and rising friction surrounding Iran’s nuclear program. These developments add a new layer of uncertainty to an already fragile geopolitical environment and represent a meaningful shift in the risk backdrop investors are evaluating.

Uncertainty in global energy markets
Iran’s position within global energy logistics heightens the significance of this event. The country’s influence over the Strait of Hormuz, a critical corridor through which roughly 20% of the world’s oil and gas supply is transported, creates immediate concerns about potential disruption. Approximately 90% of the oil passing through this channel is destined for Asian markets. Crude prices have pushed above $80 per barrel as investors weigh the likelihood of supply bottlenecks. Even a partial disruption at this chokepoint can introduce renewed volatility across energy markets and reinforce the global economy’s sensitivity to geopolitical developments.

Equity markets respond
The U.S. equity markets have reacted in several ways. Major geopolitical events typically have immediate reactions of selling off as investors assess the changing environment. U.S. equities initially moved lower as investors reassessed risk sentiment against a backdrop of elevated valuations, which tends to amplify volatility during moments of uncertainty. Higher energy prices are also contributing to inflation concerns.

Although energy represents about 7% of the U.S. consumer price basket, the impact is higher for lower income households, where fuel and utilities command a larger share of monthly expenditures. Increased energy costs could weigh on discretionary spending and slow progress on inflation.

International developed and emerging equity markets haven’t fared as well as the U.S. market, as they tend to be net oil importers, and the flight to safety benefits the U.S. dollar and markets.

Fewer interest rate cuts
The inflationary pressures have also influenced monetary policy expectations. Prior to the escalation, consensus called for two Federal Reserve interest rate cuts in 2026. Markets now anticipate only one cut as policymakers evaluate the potential inflationary impact of sustained higher oil prices. Despite this shift, corporate fundamentals remain strong.

Consensus estimates project approximately 13% earnings growth for U.S. companies in 2026, providing a stabilizing counterweight as geopolitical risks are evaluated. In fixed income markets, the 10‑year U.S. Treasury yield has remained above 4%, and corporate credit spreads have been steady.

Market volatility
Historically, markets at valuation levels similar to today have shown a 60% probability of experiencing a 15% correction and roughly a 30% probability of a 20% drawdown. While these probabilities underscore the potential for market swings, they should not alter a disciplined approach to investment management.

Through this period of market tension, it is critical to remain steadfast and remind yourself that asset allocation is the long-term driver of returns.

David Richards is a senior portfolio manager at Commerce Trust. He can be reached at david.richards@commercebank.com.