Scenario Analysis: Middle East War, Oil and the Stagflation Threat

The Iran war raises questions for multi-asset-class investors about the global economy, with oil at the center. 

History is instructive here. Our research on U.S. equity-market drawdowns since 1946 shows that the most severe and prolonged sell-offs are almost always macroeconomic or fundamental in nature — and don’t arise from geopolitical shocks in isolation.  

Looking specifically at seven U.S.-involved Middle East conflicts since 1970, we found that in six out of seven cases, equity markets recovered within the year. The one exception was the 1973 Yom Kippur War, where a sustained oil embargo triggered stagflation and a prolonged downturn. This underscores a key historical lesson: Geopolitical tensions matter most for markets when they translate into a macro shock. 

Oil disruption as stagflation trigger 

That is one of the risks today: Will the conflict disrupt energy flows through the Strait of Hormuz, a chokepoint carrying roughly one in five barrels of global oil supply? A sustained disruption could push Brent crude oil toward USD 100/barrel, reigniting inflation, freezing central-bank rate cuts and dragging on growth.¹

To assess the potential impact, we apply a stagflation scenario consistent with our latest Macro Scenarios in Focus, but with oil as the primary driver of higher inflation. We assume a 35% rise in oil prices to reflect a sustained Strait of Hormuz disruption — generating stagflationary pressures that push breakeven inflation and Treasury yields sharply higher, drag U.S. equities down 13% and strengthen the U.S. dollar. Given the nature of the shock, both equities and bonds come under pressure, while energy stocks may benefit from rising oil prices.²