Scenario Analysis: Middle East War, Oil and the Stagflation Threat
This quick take was originally published on March 3 and was updated on March 13 to reflect recent developments.
The ongoing Middle East 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
The conflict has disrupted roughly a fifth of global crude and natural-gas supply, pushing oil prices above USD 100 per barrel for the first time since Russia's invasion of Ukraine. The stagflation risk is real: reignited inflation, delayed central-bank rate cuts and slowing growth.1
To assess the potential impact, we apply a stagflationary scenario with oil as the primary driver of higher inflation using the MSCI Macro-Finance Analyzer. In this scenario, breakeven inflation and Treasury yields rise sharply, driving U.S. equities down by 12%.2 We complement this scenario with additional assumptions: Gulf Cooperation Council equities decline by 20%, reflecting production shut-ins and elevated geopolitical risk premia that offset the impact of higher oil prices; and European equities fall by 16%, a steeper drop than U.S. equities due to Europe's greater reliance on imported energy. Given the nature of the shock, both equities and bonds come under pressure, while energy stocks may benefit from rising oil prices.3
Scenario impact based on market data as of March. 10, 2026. “Other” includes the currency and breakeven-inflation shocks. Individual contributions may not sum to total profit and loss due to rounding.
Assumptions about risk-factor shocks are informed by the MSCI Macro-Finance Analyzer and by analysis of historical data and judgment. This is not a forecast, but a hypothetical narrative of how the scenario could affect multi-asset-class portfolios.
The authors thank Leo Fischler for his contribution to this quick take.
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1 Sam Fleming and Claire Jones, “What will war in Iran do to the global economy?” Financial Times, March 1, 2026.
2 In the market scenario, we use a smaller 20% oil shock compared to the 35% shock in the macro scenario. This adjustment reflects that some risk premium has already been priced in.
3 The results are generated by using model correlations to propagate shocks to the portfolios, using MSCI's BarraOne®. MSCI clients can download the correlated BarraOne stress test and RiskMetrics® RiskManager® stress test. Note that the above stress-test results capture the effect of repricing the assets, not the income component.
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