Geopolitical conflict and its impact on global markets

In an apparent response to reports of Iran’s advancing nuclear weaponization efforts, the U.S. conducted bombing missions primarily targeting Iranian nuclear facilities over the weekend.

On the first day of trading following the U.S. military action, markets remained fairly stable, but experienced a positive uptick late in the day. This shift occurred after Iran attempted a limited and reportedly ineffective military response aimed at American military bases in the Middle East. Oil prices took a sudden turn lower as a result, and equity investors reacted positively. “Without signs of a more prolonged engagement, capital markets are more inclined to focus back on global economic fundamentals,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.

Notably, 25% of the world’s oil supply originates from Middle Eastern-based OPEC countries. ¹ Markets may become concerned if any disruption to that flow alters the delicate supply-demand balance holding oil prices at modest levels throughout 2025.

Oil prices surged 9.3% immediately following Israel’s attack on Iran but dropped precipitously following the U.S. attack on Iran. ¹ “Markets are watching if it becomes a spreading conflict in the Middle East, but we haven’t seen that yet,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management. “That, and the disruption of oil flows would likely draw a bigger capital market response.”

Elevated event risk for capital markets

While fundamental factors, such as a healthy economy and strong corporate earnings, typically drive capital markets , 2025 has been a year where events frequently overshadow fundamentals. “Geopolitical events are always a consideration,” says Terry Sandven, chief equity strategist with U.S. Bank Asset Management Group. “Given the tariff and tax policy initiatives on the horizon, along with ongoing overseas conflicts, there are a lot of moving parts both domestically and abroad.”

The conflict involving the U.S., Israel and Iran is the latest global flash point. Investors continue to monitor Israel’s battle with Hamas as well as the Russia-Ukraine war, now in its fourth year. “The Middle East conflict has moved to the forefront of investor concerns,” says Haworth.

Broad energy market considerations

The targeting of Iran’s oil infrastructure is limited to this point. Oil tanker movement through the Strait of Hormuz, which Iran has threatened to cut off, is another concern. The Strait is a major oil shipping channel. “One reason Iran may not follow through on the threat is most of this oil goes to Asian countries that are not directly involved in the conflict,” says Hainlin.

Energy-related issues associated with the conflict extend beyond concerns about oil production. Haworth notes that natural gas reserves are typically generated in conjunction with oil drilling. “The more oil you drill, the more natural gas that tends to result as well,” says Haworth. “If oil drilling activity is slowed, that could hamper natural gas supplies.”

Haworth notes that this has been a factor in recent natural gas price fluctuations. Unlike oil prices, which move on a global level, natural gas prices are regional. “Natural gas prices in Europe are more susceptible to any interruption in Middle East natural gas production,” says Haworth. He notes that Europe reduced its imports of Russian natural gas after the Russia-Ukraine war broke out in 2022. As a result, Europe is more reliant on natural gas produced in the Middle East.

A partially shielded U.S. economy

Haworth notes the U.S. economy appears to face limited immediate risk from the emergence of a new Middle East hotspot. “Even if oil prices move up from here,” says Haworth, “they are starting from a relatively modest level.” He notes that in the immediate wake of Russia’s invasion of Ukraine, the price of oil jumped above $120/barrel. ¹ The price today is more than one-third below that level.

The more specific market repricing could occur if the U.S. gets directly involved in a war involving Israel and Iran, says Haworth. “That could diminish investor risk appetite somewhat, which could negatively impact stocks in the short term.”

Sandven notes that the broader inflation risk that could follow 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, the Federal Reserve might be forced to raise interest rates, which could temper corporate earnings.”

However, Sandven notes we’re a long way away from that scenario taking hold. “For now, inflation remains stable, interest rates are range-bound, and corporate earnings are trending higher,” says Sandven. “That’s a backdrop for higher equity prices.” These fundamental factors appear to counterbalance investor concerns over recent geopolitical developments.

“If this newly emerging conflict remains relatively confined and does not persist for long, it’s likely the market impact will be negligible,” says Haworth.

Along with geopolitical hotspots, Sandven notes that markets are closely watching congressional action on the so-called One Big Beautiful Bill Act, which deals with tax and budget policies at the federal level. Ongoing trade developments centered around newly imposed U.S. tariffs also have potential economic implications that could be reflected in capital markets.