Geopolitical conflict and its impact on global markets

Geopolitical conflicts dominate headlines because they constrain commerce, damage property and infrastructure and, in tragic cases, claim human lives. For example, the ongoing war between Russia and Ukraine, the Israel-Hamas conflict in the Gaza strip and Yemeni-based Houthi rebel attacks on maritime vessels in the Red Sea all illustrate how these disputes unfold. These events not only result in tragic loss of life, but they also create significant market risks.

Declining market confidence and weakening earnings can trigger temporary equity market declines. According to a recent International Monetary Fund paper, such events typically cause an average one-month equity market drop of around 1%. ¹ Certain conflicts also disrupt the supply of key goods or commodities. When major oil producers face conflict, oil prices often spike because these disputes threaten production and supply infrastructure. We must actively monitor both the short- and long-term effects of these conflicts on markets and our clients’ investments.

Israel and Hamas agree to a ceasefire

On October 9, Israel and Hamas agreed to cease hostilities in their two-year war in the Gaza Strip. Both sides are working through the first stage of the agreement, which includes a prisoner and hostage exchange. Gaza’s future governance remains uncertain. The Trump Administration unveiled a 20-point peace plan on September 29. Under the U.S. plan, phase one includes the hostage-for-prisoner swap and ceasefire, with Israeli forces withdrawing to an agreed line. The plan also calls for a supervisory international body to oversee a transitional Palestinian technocratic government until it can run Gaza’s day-to-day affairs.

Oil market impacts

Middle Eastern-based OPEC countries produce 25% of the world’s oil supply and export more than two-thirds of their production. Disruptions to that flow alter the delicate global supply-demand balance. The 1973 OPEC embargo against the U.S. and several European nations provides the most extreme historical case, when oil prices quadrupled and the U.S. fell into a deep recession.

Oil prices surged 9.3% immediately after Israel attacked Iran on June 13. ² Iran threatened to cut off oil tanker movement through the Strait of Hormuz, a major oil shipping channel. ³ However, oil prices dropped precipitously after the U.S. struck Iran’s nuclear facilities on June 22. “Investors observed that the conflict remained contained between Israel, U.S., and Iran,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management. “If the conflict escalated to other countries or if Iran successfully restricted oil flows, we would have seen a bigger capital market response.”

Equity market reactions

Fundamental factors, such as a healthy economy and strong corporate earnings, typically drive capital markets, but political events can periodically overshadow fundamentals. “Geopolitical conflicts are always a consideration,” says Terry Sandven, chief equity strategist with U.S. Bank Asset Management Group. “Investors are navigating a lot of moving parts in 2025, including the tax bill, President Trump’s changing tariff policies, and the government shutdown along with ongoing overseas conflicts.”

Stock markets initially fell after Russia invaded Ukraine and Hamas attacked Israel. Sandven notes that the broader inflation risk following an upturn in oil prices is another market consideration. “Inflation is kryptonite to stock valuations,” says Sandven. “If energy prices rise and the price of other goods follow, this might force the Federal Reserve to raise interest rates, which could temper corporate earnings.”

However, in all three cases, equity prices quickly recovered once investors digested the conflicts’ scope and potential outcomes and oil prices receded. U.S. equity markets remain just off record highs, after rebounding decisively from repeated setbacks. Company fundamentals and generally stable economic data, including robust consumer spending, continue to support higher trending stock prices.

The Russia-Ukraine conflict continues

The world has cheered the cessation of hostilities across many global flashpoints in 2025, including nuclear-armed India and Pakistan. However, the Russia-Ukraine conflict, which broke out on February 24, 2022, remains ongoing. In the immediate wake of Russia’s invasion, the price of oil jumped above $120/barrel. However, the oil price today is less than half that level.

Easing Mideast tensions and unrestricted regional energy supplies help offset investors’ geopolitical risk concerns. Unlike oil prices, which move on a global level, natural gas prices are regional. “Interruptions in Middle East natural gas production make European natural gas prices more vulnerable,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. He notes that Europe reduced its imports of Russian natural gas after the Russia-Ukraine war broke out in 2022. As a result, Europe relies more on Middle East producers for natural gas.

Investors continue to capitalize on a favorable environment

Resilient consumer spending and business investment benefit equity markets, and major companies continue to report strong profit growth. Geopolitical events introduce additional risks, but so far, have not escalated to broader conflicts producing negative economic effects.

Market fundamentals appear well-positioned for ongoing growth in the near term. This may be an opportune time to connect with your wealth planning professional. Discuss your comfort level with your current portfolio in relation to ongoing economic changes, your personal objectives, and your risk appetite.