From a secondary worry to a front-line market risk, conflict in the Middle East has moved to the top of investors' concern lists. U.S.-Israel strikes that killed Iranian Supreme Leader Ayatollah Ali Khamenei on Saturday have been followed by Iranian reprisals against Gulf cities, airline suspensions and tankers pausing passage through the crucial Strait of Hormuz - developments that feed through to global trade, commodity prices and inflation expectations.
At the core of market anxiety is uncertainty about what comes next in Iran. The country’s complex ruling structure, a base of ideologically driven support and the influential role of the Islamic Revolutionary Guard Corps complicate any attempt to forecast Tehran’s political reaction or the durability of a ceasefire. Those unknowns directly affect oil price dynamics, which have already been on the rise for weeks.
Oil markets are now sensitive to actions taken by oil-producing nations and to any disruption in tanker traffic passing through the Middle East, with significant implications for inflation and the traditional safe-haven status of some bonds. "Middle East tail risks have increased. Markets will reprice from geopolitical shock to regime risk shock, prolonged conflict, not just retaliation, unless Iran says it wants to negotiate," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.
Analysts warn that a more dangerous scenario may be investors' complacency. Markets have previously treated regional flare-ups as contained events, as during last June’s "12-Day War" in Iran and amid repeated Russian strikes on Ukraine, and have shown reluctance to draw parallels with Iran’s 1979 regime change. That habit of assuming limited fallout could leave portfolios exposed if containment fails.
So far this year Brent crude has risen by roughly a fifth and is trading around $73 a barrel. Investors have sought protection in U.S. Treasuries and gold amid a range of concerns that include tensions in the Middle East and the unpredictability of President Donald Trump’s policies. Gold, which had a record run last year, is up 22% so far in 2026, while the main U.S. stock index is only modestly higher at about 0.5% year-to-date.
Barclays analysts cautioned that history has often favored selling geopolitical-risk premia at the start of hostilities. "History argues strongly in favor of selling geopolitical risk premium when hostilities start," they wrote. Their concern is that investors who have come to expect quick containment may be underpricing the risk of prolonged conflict and regime-level threats. Barclays flagged other vulnerabilities that could amplify any market selloff, including apprehension around the artificial intelligence investment boom and stresses in private credit markets.
Barclays advised against buying into any immediate dip, saying the current risk-reward profile is unattractive. They suggested that a deeper pullback - for example a greater than 10% drop in the S&P 500 - might create a buying opportunity, but they do not see that point as having arrived yet.
Markets are likely to be volatile in the near term. "The markets are prepared for a limited surgical strike. What is not priced in is a major strike to decapitate the regime," said Charles Myers, chairman and founder of Signum Global Advisors, speaking before the weekend U.S.-Israel strikes.
Some forecasters expect a protracted conflict that affects supply to push oil much higher. William Jackson, chief emerging markets economist at Capital Economics, projects that oil prices could surge to around $100 a barrel in that scenario, potentially adding roughly 0.6-0.7 percentage points to global inflation.
Other market participants see the inflation impact as more muted. Tariq Dennison, a wealth adviser at Zurich-based GFM Asset Management, said the market may already be overstating inflationary forces, suggesting any change would be limited and likely felt more acutely in Europe than in the United States due to proximity to Hormuz oil and gas routes. He also noted that gold may see only a short-term uptick, as it has already reflected elevated geopolitical uncertainty.
Eastspring’s Goh highlighted the fall in U.S. yields that has driven 10-year Treasury yields below 4%. He questioned the wisdom of buying U.S. Treasuries now, especially if oil spikes and feeds into inflation over a drawn-out conflict.
Conversely, some analysts expect Iran to be unable to meaningfully disrupt Gulf trade and foresee only a contained effect on oil markets. Ed Yardeni, president of New York-based Yardeni Research, said he would not be surprised if an initial selloff in the S&P 500 reversed into a rally as expectations of lower oil prices post-conflict take hold. He added that gold might also retrace any early gains, while bond yields could decline due both to safe-haven demand and an eventual easing in oil prices once the conflict subsides.
Investors face a mix of near-term market dislocations and longer-run uncertainty. With commodities, equities, sovereign bonds and risk assets all potentially affected, portfolio decisions over the coming days and weeks will hinge on how events in Iran and the wider Gulf region evolve and whether policymakers and market participants view the situation as containable or as a trigger for deeper geopolitical and economic shocks.
Summary
Escalation in the Middle East after U.S.-Israel strikes that killed Iran’s Supreme Leader and Iran’s retaliatory actions has turned a peripheral risk into a primary market concern. Key issues are the unpredictability of Iran’s internal dynamics, the sensitivity of oil prices to any disruption in Gulf shipping, and the potential for inflationary pressure that could unsettle bonds and equities. Investors have increased allocations to Treasuries and gold, but analysts warn complacency could leave markets exposed if containment fails.
Key points
- Geopolitical uncertainty in Iran is feeding into global markets, with oil prices and inflation expectations particularly sensitive.
- Safe-haven flows have supported U.S. Treasuries and gold; gold is up 22% so far in 2026 while the main U.S. stock index is up about 0.5%.
- Sectors directly affected include energy (oil and gas), airlines and shipping, and inflation-sensitive areas such as bonds and consumer prices.
Risks and uncertainties
- Unclear political trajectory in Iran - including the role of its power structures and the Revolutionary Guards - complicates scenario planning for markets, particularly for oil and geopolitically sensitive assets.
- Rising oil prices could lift global inflation and undermine bond returns, with estimates that a supply-driven spike to around $100 a barrel could add roughly 0.6-0.7 percentage points to global inflation.
- Market complacency - investors may be underpricing the chance that conflict becomes prolonged or evolves into regime-level risk, which could amplify selloffs across equities and credit markets.