Iran Conflict, $100 Oil and What It Means for Stocks and Consumers

With fading hopes of a quick end to the Iran conflict, concerns about the economic and earnings returned to dominate market action. Though the history of geopolitical shocks typically points to a temporary impact on stocks, volatility is likely to persist while the economic impact of high oil prices remains unknown. This article explores the damage done to consumer sentiment and the economy so far.

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Market Reaction

Last week, the S&P 500 fell by 2.1%, with the Magnificent 7 faring worse.

The S&P 500 is now down 7.3% since the onset of armed hostilities with Iran, while energy stocks are up 12.6%.

Since hostilities began on February 28, the US dollar has continued to strengthen with its safe-haven status remaining intact. Yields on the 2-year and 10-year US Treasury bonds are higher, driven by elevated inflation expectations and uncertainty. Notably, international stocks have underperformed US stocks by a wide margin since the start of the conflict with Iran. International stocks have fallen 10.2%, with about two percentage points of that decline attributable to the strong US dollar.

Oil

As discussed previously, oil supply fears stemming from disruptions in the Strait of Hormuz are the primary financial market impact of the conflict with Iran. While the US economy is more resilient to oil price increases than in the past, US oil prices will still reflect global supply shocks. Prolonged elevated oil prices will negatively impact US and global economic growth and increase inflation. WTI crude has risen from $67 per barrel before the conflict began to over $99 last Friday.

The most visible negative impact on consumers is seen daily at the pump. The average retail price of gasoline in the US has already increased to $3.98 per gallon, according to AAA, from $2.98 before the Iranian conflict.

Financial Market Transmission

There are three real-time indicators that can be monitored to gauge the stress on the US economy and markets from rising oil prices.

Corporate bond spreads, the premium over US Treasuries that a company pays to borrow money, rise when concerns about default risk increase, typically associated with economic downturns. While corporate bond spreads are above their level at the start of the year, they are slightly lower than at the start of the Iran conflict.

Financial conditions measurements can help provide a stress gauge for financial markets. The Bloomberg US Financial Conditions index uses interest rates, credit spreads, stock prices, the US dollar, and market volatility to provide insights into whether financial conditions are improving or deteriorating.

Lower or tighter financial conditions imply a headwind for the economy, while higher or looser conditions are a tailwind. US financial conditions have deteriorated since the beginning of the armed conflict with Iran, but remain well above the recent daily lows reached amid tariff fears in April 2025.

Prediction markets can also provide another way to gauge the risk of a downturn. The odds of a 2026 US recession were 22% before the bombing of Iran and have risen to 37%. Notably, the probability of recession rose by 3 percentage points last week with the setback in peace negotiations.

Sentiment & Actual Behavior

Another good way to gauge the economic fallout from the conflict is by monitoring high-frequency economic data. Consumer sentiment has clearly slipped; not surprisingly, those making less than $50k having the weakest readings as they are most heavily impacted by the rise in energy prices. Interestingly, sentiment among those making more than $100k has taken a nosedive, despite the impact on their finances being less severe. The higher-income consumer is crucial to the economy, so that sends a concerning signal.

While sentiment is worth monitoring for evidence of a possible slowdown, actual behavior is crucial for forecasting economic activity. Fortunately, consumer behavior is not yet showing much negative impact from the Iran conflict and the resultant higher oil prices. Restaurant reservations show no sign of distress.

Despite the lack of funding to pay TSA agents at the airports, US air travel shows no sign of collapse.

Most importantly, the Redbook weekly measure of US consumer retail spending evidences no significant negative impacts.

What to Watch This Week

The status of hostilities with Iran and oil prices are likely to remain the main focus for financial markets this week, though the monthly jobs report will be closely watched. As the end of the calendar quarter is next week, there are very few earnings reports from S&P 500 companies.

While the February retail sales report on Wednesday will be important, it will be given less weight because the data predates the start of the Iran conflict. As is typical, the monthly jobs report will be dissected for clues about the strength of the US labor market. The consensus expected the unemployment rate to remain unchanged in March, with a small gain in nonfarm payrolls after the decline reported in February.

Since stocks are down about 9% from their late-January peak, the S&P 500 is nearing correction territory, defined as a 10%+ decline from previous highs. Despite never being a pleasant occurrence, these downdrafts are a normal part of the stock market, with an average intrayear decline of 14.6%. Despite these setbacks, stocks have posted positive returns in 43 of the last 53 years and produced an unrivaled long-term annualized return of 10% since 1928.

More specifically, regarding geopolitical conflicts, an analysis of past major geopolitical events shows that it hasn’t generally paid to sell stocks in response to these events. Glenview Trust examined stock performance following 29 major geopolitical events. These events ranged from Germany's invasion of France in 1940, which resulted in a 22% decline after 1 year, to the Iraq War in 2003, which had a 28.4% gain after a year. Over 80% of the time, stocks are higher again after 1 year, sometimes sharply higher, despite the added uncertainty. Specific to the current conflict, while consumer sentiment has plunged, high-frequency economic activity offers comfort that US consumers and the economy have remained resilient so far.

By Bill Stone, Contributor