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What Happened
The Iran conflict has introduced a critical inflection point for global markets, with the energy channel emerging as the dominant transmission mechanism. Disruptions around the Strait of Hormuz have pushed oil prices higher, lifting inflation expectations and complicating the global growth outlook. As we head into the second month of the conflict, economic pressure builds globally. The key market debate now shifts to what the implications are for equity markets from the risks of a prolonged conflict versus a potential de-escalation — with two distinct and binary scenarios emerging.
What It Means
Scenario 1: De-escalation and Gradual Normalisation
In a constructive outcome where the US and Iran reach an agreement to de-escalate, the Strait of Hormuz could begin to normalise over the next one to two months. Under this scenario, the impact on global growth is likely to remain limited. Energy prices may retrace from recent highs, although they are likely to remain above pre-conflict levels given that physical supply chains and inventories will take time — potentially a few months — to fully stabilise.
Scenario 2: Prolonged Conflict and Sustained Energy Shock
In a more adverse scenario where the US and Iran fail to reach an agreement and the Strait of Hormuz remains disrupted for several months, the risk of further damage to energy infrastructure from bombardment in the Gulf states will rise. The risks to the global economy would also increase materially with each passing week. Sustained elevated energy prices would act as a tax on global growth, disproportionately impacting energy-importing economies across Asia and emerging markets.
What differentiates energy and defence in the current context is that they are not binary trades tied to one outcome — they are beneficiaries across both scenarios, albeit with varying degrees of upside.
- In Scenario 1, energy benefits from a higher price floor, earnings resilience, and under-ownership, while defence is supported by sustained geopolitical risk and budget expansion.
- In Scenario 2, both sectors see accelerated upside, driven by supply shocks (Energy) and prolonged military engagement (Defence).
Despite the recent move in oil prices, energy remains underrepresented in equity indices, constituting only 4% of the S&P 500 as of Mar 2026, up from 2.8% in Dec 2005, but still well below historical peaks. By comparison, during the 1970s energy crisis, energy’s weight surged from 7% of the S&P 500 in 1972 to a peak of 28% in 1980.
How to Invest
The market outcome remains largely binary at this point and US-Iran actions over the next few days and weeks could help narrow the scenarios and shape a clearer narrative for market direction. A swift de-escalation reinforces the current narrative of resilient growth and corporate earnings, while a prolonged conflict risks triggering a more fragile macro backdrop and defensive positioning. While markets may be focused on whether the Iran conflict resolves quickly or escalates further, from an equity allocation perspective, energy and defence may stand out as consistent tactical and structural winners across both paths.
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Related insights
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