After the Iran-U.S. conflict "ignited" oil prices, how will it affect the stock market and the economy? Read to understand

Caixin March 3 (Editor Huang Junzhi) After the outbreak of conflict between Iran and the U.S., oil prices surged. Analysts and strategists generally believe that if energy prices continue to rise, it will have a negative impact on the markets and the economy.

On Monday, international crude oil futures settlement prices rose sharply by over 6%, after initially soaring more than 12 during the trading session. Meanwhile, the stock markets also experienced intense volatility: the S&P 500 and Nasdaq opened sharply lower due to geopolitical tensions but ultimately closed roughly flat. Goldman Sachs analysts believe that the impact on the energy market is the “main” effect of this conflict on the global economy and markets.

Daniel Yergin, Vice President of S&P Global, said in a recent interview that, “The long-term severity of oil market disruptions will depend entirely on the duration of the conflict.”

He warned, “If the conflict lasts only a week, markets can adjust, and alternative routes to the Red Sea can deliver some oil to the West. But if it persists longer, we could face the nightmare scenario that people have feared for the past 50 years.”

Below are four ways the Iran-U.S. conflict could impact the economy and markets:

1. Stock markets under pressure, volatility expected to increase The escalation in the Middle East has caused significant volatility in the U.S. stock markets, but analysts say the long-term impact depends on the duration of the conflict and the scale of disruptions to the oil supply chain.

Goldman Sachs states: “The initial market reaction is often driven by increased uncertainty and broader risk premiums. This situation is generally unfavorable for stocks and credit markets. Rising energy prices negatively impact the stock market because they increase costs for related companies, potentially affecting their profits.”

Goldman emphasizes that cyclical industries, especially airlines and oil-dependent manufacturing sectors that serve consumers, face risks.

Morgan Stanley noted that a sharp rise in crude oil prices above $100 per barrel would significantly impact their optimistic outlook for stocks this year.

On the other hand, energy producers are expected to perform well when oil prices are high. J.P. Morgan analysts pointed out that mining and metals companies could become potential stock winners.

2. Inflation outlook may complicate the Fed’s next steps A sharp rise in oil prices could trigger a new round of inflation, which might pressure the overall economy and influence the Federal Reserve’s rate-cutting path.

“War often leads to inflation,” said analysts at William Blair, adding that central banks tend to increase money supply and lower short-term interest rates to support wartime government spending. J.P. Morgan also expressed similar views.

Siebert Financial Chief Investment Officer Mark Malek said, “Short-term stock sell-offs are not the core risk; inflation shocks are. Energy shocks influence monetary policy directions much faster than headlines suggest.”

Meanwhile, consumers may face rising gasoline prices.

Malek added that consumers are most concerned about affordability and economic conditions, “Gas prices have a strong psychological impact—they are the inflation figures consumers see every day.”

Jay Woods, Chief Market Strategist at Freedom Capital Markets, also said that prolonged high oil prices will raise inflation concerns because it would be “a huge and unexpected tax on consumers, and the Fed, under pressure from the president to cut rates, doesn’t need to deal with this issue.”

3. Surge in oil prices could weaken global economic growth Renowned economist and Allianz Chief Economic Advisor Mohamed El-Erian said that the Iran conflict poses a “negative shock” to the global economy. Disruptions in the global supply chain, especially the blockage of the Strait of Hormuz, could slow economic growth.

J.P. Morgan stated that continued declines in oil supply would severely drag down global economic growth, as rising oil prices threaten demand. Supply chain disruptions further exacerbate stagflation risks. Goldman Sachs noted that compared to other oil-importing countries, the U.S. is in a relatively better position, while major markets like South Korea, Japan, Turkey, and India are more vulnerable to oil supply disruptions.

4. Flight to safe-haven assets Market highlights may include precious metals and the U.S. dollar as safe-haven assets. J.P. Morgan said that the Iran conflict will push up commodity prices and boost the dollar.

The bank’s analysts wrote, “We believe that geopolitical tensions and inflation factors are more important than the dollar’s rebound at the moment, so commodity prices should rise.”

“Despite the dollar’s rebound, prices of precious metals, oil, and commodities continue to rise, even when priced in dollars,” said Hong Hao, Chief Investment Officer at Lotus Asset Management Ltd. “This indicates that, in this special period, these hard assets are the real hard currencies.”

Independent analyst Ross Norman also said, “Gold may be the best barometer of global uncertainty, and metaphorically, the mercury is rising. As we enter a new era of geopolitical uncertainty, we should expect gold prices to reprice and reach new highs.”