Why the Stock Market Remained Resilient Amid the War in Iran

Key Takeaways

• US stocks ended the week lower as the war with Iran disrupted the outlook for oil prices, economic growth, and inflation.
• Those losses have been somewhat muted, however, with the Morningstar US Market Index down less than 1.6% this week and 4.2% since the start of the war.
• After falling on hopes for a speedy resolution to the conflict, oil prices spiked to end the week.

As the US war with Iran carried on for its second week, financial markets remained resilient despite elevated volatility, an increasingly uncertain economic outlook, and conflicting headlines.

After rallying Monday and Tuesday following comments from US President Donald Trump suggesting a speedy end to the conflict, the Morningstar US Market Index ended the week 1.6% lower. Since the war began at the end of February, stocks have fallen roughly 4.2%.

Accompanying those declines were outsize moves in oil prices. With the Strait of Hormuz, a key artery for the oil market, at the center of the conflict, oil prices have climbed rapidly as the global economy scrambles to readjust to severe supply chain disruptions.

The West Texas Intermediate benchmark ended the week at $98 per barrel, up from about $65 per barrel before the war began. Oil prices fell early in the week following Trump’s comments but continued their dramatic rise as the conflict intensified in the subsequent days.

In the bond market, the yield on the 10-year US Treasury note rose from 4.198% on Monday to 4.286% on Friday as investors grappled with new sources of geopolitical and economic risk.

Stock Losses Limited, Volatility Likely to Persist

Analysts say that losses in stocks have been surprisingly muted despite the increased volatility and uncertainty.

“The markets have been incredibly resilient,” says Anthony Saglimbene, chief market strategist at Ameriprise Financial. He attributes that resilience to strong underlying fundamentals that were in place before the conflict began. “Corporate profits are growing,” he says. “Growth has been pretty strong in the economy. Inflation was slowly moderating. The employment backdrop was pretty solid. We entered this period of uncertainty in pretty good condition.”

With the war continuing to escalate and the ultimate impact on oil markets still unknown, however, analysts say investors should expect volatility to persist in the short term.

“Until there’s visibility on the duration of the supply disruption, we think that the bias for markets is down from here,” says Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

He points to lower growth expectations, higher inflation expectations, and a Federal Reserve that’s stuck on the sidelines pending more data about how the disruption to oil prices will feed into the economic data. “We’re going to continue to have some choppiness as we look forward over the next couple of weeks.”

Oil Prices Drive Market Dynamics, Sector Dispersion

That choppiness is in large part attributable to energy prices. Below the surface, the impact of the war on markets these past two weeks is “directly related to oil,” explains Olaolu Aganga, head of portfolio construction in the chief investment office at Citi Wealth.

Energy stocks were the week’s best-performing sector, up 1.88% for the week and 3.23% since the start of the conflict. The worst-performing sector over the past week was financial services, down 3.37%.

While the market’s response may look more muted from an overall perspective, Aganga says, “if you look under the hood, you will see greater dispersion within sectors.”

Long-Term Outlook Could Stabilize

For many on Wall Street, however, the long-term outlook is still stable. The same forces that have stabilized stocks so far—robust corporate earnings and sustained economic growth, for example—could continue to support the market.

“Our base case is that the market feed-through of geopolitical risk … will fade over time,” says Aganga of Citi Wealth.

She says that’s consistent with how markets have reacted to other similar shocks throughout history. The challenge, she adds, is that no one can predict just how long the disruption will last. “The longer and more protracted it is, the more of an adverse impact we’ll have,” she says.

“Given our view that the US economy is going to be quite strong this year, even with elevated oil, we think investors will ultimately look through this,” adds Schulze of ClearBridge.