Investors girded themselves on Sunday for the global market’s reaction to the joint attack on Iran by the United States and Israel, which has brought disruption to oil markets, shipping and supply chains.
Wall Street has largely shrugged off geopolitical upheaval in recent years, noting that conflicts have had little effect on the profits of major publicly traded companies. The last two U.S. military interventions — the capture of Venezuela’s leader, Nicolás Maduro, in January and the bombing of Iranian nuclear facilities last June — had a negligible effect on financial markets.
This weekend’s turmoil in the Middle East, however, comes at a more precarious time for the stock market.
The market dominance of technology companies has waned this year as concerns about artificial intelligence mount. The new drivers of the market are industrial and energy companies, which are more directly tied to the global economy and world events. Some analysts said this has left the market more vulnerable to the current shock from the Iran war.
The most acute impact is likely to be seen in the oil market, which opens for trading on Sunday evening. Analysts at Eurasia Group forecast that oil prices could rise as much as $10 per barrel on Sunday after Iran closed the Strait of Hormuz, a vital shipping lane for oil leaving the Middle East. Iran threatened to shutter the strait last year but did not follow through.
Members of OPEC Plus, the large international group of oil-producing countries, have said they intend to increase their oil output to try to counter any hit to supply from the war.
Oil prices are a cost for most companies, and while short-term fluctuations are unlikely to have much effect on corporate balance sheets or the U.S. economy more broadly, sustained disruption to the oil market could hurt companies that are heavily dependent on oil, like airlines.
In contrast, oil companies themselves, whose stocks have already been lifted in recent weeks as oil prices have been rising, are expected to continue to benefit from the disruption.
“To me, the most obvious thing here is if you are overweight oil stocks then you are happy,” said Michael Purves at Tallbacken Capital.
While a rise in oil prices is typically inflationary, pushing up interest rates, the latest shock is likely to add to the risks for the global economy, potentially leading to increased expectations of central bank rate cuts in anticipation of any negative impact on the U.S. economy.
Investors have been rewarded over the past year by “buying the dip,” when the market has declined and then quickly recovered. But the conflict with Iran could present a period of prolonged uncertainty for markets as the path to de-escalation in Iran is not as clearly laid out as it was when the United States and Israel targeted Iran’s nuclear facilities last June.
“We would recommend not buying any immediate dip — the risk-reward doesn’t seem compelling,” said Ajay Rajadhyaksha, global chairman of research at Barclays. He said the market could fall over the coming days before any rebound.
“There is likely to come a time to buy,” he said. “But not yet.”
For now, investors remain broadly sanguine, anticipating a short-term shock across markets that is currently expected to last a few weeks at the most.
“I would not be surprised to see stocks close up on Monday and oil down,” said Peter Tchir, head of macro strategy at Academy Securities.
Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.
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