A Market Perspective on Israel and Iran’s Latest Conflict

Tensions are high again in the Middle East after Israel launched widescale strikes on Iran early Friday morning local time, prompting counterstrikes from Tehran. With the world watching the hostilities unfold between the two regional powers and tough statements from their allies, oil prices jumped and global markets dipped modestly—though stocks’ pullback intensified after Iranian missiles hit Tel Aviv shortly before US market close Friday. Many understandably fear the prospect of a broader conflict. But during times like this, we urge investors to take a breath and see how markets normally deal with such things: Regional conflicts like this may stoke short-term volatility somewhat, but they are unlikely to disrupt economic activity sufficiently to drive a bear market.

As many likely know, this is the latest episode in a longer-running conflict in which both sides have suffered the loss of life and destruction. It is a complex, tragic issue with many sociological and political implications, and we empathize with those affected. But like stocks, our focus is on the market-related implications only. And as is typical when tensions flare, uncertainty is driving volatility.

Some quick background: America and Iran were set to meet for another round of nuclear talks this weekend. Iran had threatened to strike American assets in the Middle East if Israel attacked Iran over its nuclear program. On Friday, Israel made good on its overtures, attacking Iranian nuclear facilities and killing military leaders and scientists. Tehran responded first with drone strikes and then ballistic missiles fired toward Tel Aviv, some of which slipped through Israel’s staunch defenses. Those planned US – Iran negotiations have since been called off.

Global oil prices jumped as high as 13% on the news before paring back gains. Global stocks largely retreated, but their pullback deepened after news of Iran’s counterstrike.^[i] Both the S&P 500 and MSCI World Index closed Friday down -1.1%.^[ii] With both sides promising more to come, questions about the market fallout abound. Will Iran block the Strait of Hormuz, the world’s busiest oil shipping channel? What are the implications for global oil markets? And if hostilities escalate, will an enlarging regional war pull in other major powers—leading to a global conflict?

Let us begin with the global oil market implications. Many presume a conflict will disrupt Iranian supply, lifting prices. Yet when we scale Iranian production, its influence appears minimal. Iran accounts for around 4% of global oil production, with most of its exports sent to China.^[iii] Not insignificant, but not a swing factor, either, when compared to America (22% of world production), Saudi Arabia (11%) and Russia (11%).^[iv] China has infamously been boycotting US oil the past couple months as part of the tariff standoff, but with trade tensions easing, US crude flowing there could be one way supply adjusts.

Crucially, the global oil market isn’t tight. Global inventories have exceeded seasonal norms this year, hinting at some oversupply.^[v] Even with Friday’s jump, at $74.56 per barrel, Brent crude oil prices remain at the low end of their 2023 and 2024 range—and well below their recent high in 2022.^[vi] Before Friday, prices were low enough that the EU was trying to lower its Russian price cap.

Moreover, some major producers are looking to increase production. For months, the OPEC+ oil cartel has indicated plans to boost output, with leading member Saudi Arabia seeking to punish over-producers and regain market share. Higher prices, should they stick, would also alleviate some of the financial pressures causing US producers to consider cutting back. So a major shortfall in oil supply doesn’t look likely in the foreseeable future

What about worries about the Strait of Hormuz? Yes, Iran’s successfully cutting off this major passage would affect close to one-third of global seaborne oil—most of which is going to Asia. Those disruptions may drive some volatility in markets, force shippers to find alternative routes, leading to delays. But Iran has never blockaded the strait despite a multitude of threats to do so over the past 40 years. It is an open question whether its naval forces are actually capable of the feat. Plus, Iran’s cutting off access to the strait risks alienating its biggest buyer, China, making it something of an own goal. We don’t dismiss the possibility, and trying to predict politicians’ decisions is near-impossible, in our view. But keeping that historical context in mind argues against a worst-case scenario.

As scary and tragic as the fighting is, this unfortunately isn’t new. There is a long-running history of conflict in the Middle East, but you don’t even need to look that far. Israel has scuffled with Iran twice since the October 7, 2023 attacks by Hamas on Israel. In both cases, short-term volatility arose as investors feared all-out war between the two pulling in the US and other major powers. But the tensions quickly dialed down. Oil prices’ initial jolt didn’t last, and stocks moved on quickly.

Exhibit 1: Global Oil Prices Since 2023

Source: FactSet, as of 6/13/2025. Brent crude oil price, 12/30/2022 – 6/13/2025.

Exhibit 2: Global Stocks Since 2023

Source: Factset, as of 6/13/2025. MSCI World Index returns with net dividends, 12/30/2022 – 6/13/2025.

Another way to think about this: If the risk of war between Israel and Iran were a major market risk, it would show up most in Israeli stocks, given they would be most directly affected. Yet Israel was the top-performing nation last year in the MSCI All Country World Index, which combines MSCI’s World and Emerging Markets indexes, at 38.3%—more than doubling the index’s 17.5%.^[vii] We don’t think Israeli stocks were missing anything—rather, they recognized the tensions were unlikely to spiral in a way that would disrupt earnings materially. And if that is true for stocks local to the conflict, logic dictates it is even more true for stocks across North America, Europe and Asia, where the fighting is highly unlikely to disrupt everyday commerce.

Markets’ behavior throughout this latest Middle East conflict is emblematic of how stocks typically deal with regional conflict. There may be some volatility in the run up due to increased uncertainty as markets grapple with the potential for war and fears of wider disruption. But it is usually fleeting—even if conflict actually breaks out. When fighting occurs during a bull market, stocks typically resume rising well before it ends. Even in 2022, when Russian’s invasion of Ukraine was one of many fears stinging investors, the bear market ended that October, as the war grinded on. Stocks recognize the scope and scale (or lack thereof) and move forward. Cold as it is, they see commerce is likely to continue uninterrupted in the vast majority of the global economy, preserving earnings growth.

Understand, we aren’t dismissing fears of broader war. These situations are fast-moving and unpredictable. The weekend could bring a swift diplomatic solution or more strikes. There is no way to know. But as challenging as today’s headlines may be, markets have a long history of regional conflicts not being auto-bearish—even in the Middle East.

H/T: Fisher Investments Research Analyst Larissa Murray