Geopolitical tracker: Market implications and manager reactions to Iran escalation

Key takeaways

• Markets are responding primarily to uncertainty, with oil prices rising and equities volatile.
• The economic impact will depend largely on energy supply disruption, particularly whether oil prices remain contained or move sharply higher.
• Our portfolio positioning remains near strategic targets, with potential to lean into risk assets if volatility creates attractive entry points.

Over the weekend, the United States and Isarel launched a joint attack on Iran, which President Trump has indicated may continue for several weeks. Equity markets originally sold off on the news Monday morning before rebounding to near the flatline. Equity market volatility continued into Tuesday, with U.S. equities oscillating between a decline of 1% and 2.5%. Meanwhile, oil prices climbed further, reaching around $80 a barrel on fears that Iran may close the Strait of Hormuz — a vital passageway for global energy.

Geopolitics affects asset prices through two primary pathways — sentiment and economic fundamentals — as rising uncertainty dampens spending and increases risk aversion, while disruptions to commodities, capital flows, supply chains, and even physical infrastructure ripple through growth, inflation, earnings, and ultimately valuations.

In the current situation, movements in oil prices and changes in global risk sentiment are the key indicators we are monitoring closely. Here’s how we see the current episode flowing through those channels — and what it means for asset prices. 

We think global equities are more likely to be negatively impacted by the rising oil prices and supply chain disruptions in the Middle East. In the U.S., although some volatility is likely, we expect lesser impacts to asset prices overall since the country is a net oil exporter and is on solid economic footing.

Meanwhile, although U.S. Treasuries are generally viewed as a safe-haven asset during times of market volatility, the oil price shock may cause investors to worry that stickier inflation could lead the Fed to remain on a protracted hold instead of cutting rates further, potentially adversely impacting fixed income. Corporate bonds could sell off as credit spreads widen on higher risk aversion.

For now, we remain close to our strategic asset allocation because we do not see signs of the crisis meaningfully disrupting U.S. and global growth. Because of this, we may potentially lean into risk assets during any potential market drawdowns.

• Base case
  Oil prices stay below $80 a barrel, limiting economic impacts. Markets are volatile in the short-term but ultimately grind higher as fundamentals hold and investors look through the conflict.
  
  
• Bull case
  The conflict resolves quickly, oil flows through the Strait of Hormuz are restored, and oil prices drop towards $60 a barrel. Markets rebound on the prospects for uninterrupted growth.
  
  
• Bear case
  A protracted closure of the Strait leads to energy shortages globally. Oil prices jump well above $100 a barrel and sustain at those levels, leading to a spike in inflation and a sharp drop in markets. Consumer spending pulls back, and the global business cycle slips into a recession.

We surveyed a broad cross-section of our underlying managers on the conflict, and their views coalesce around a base case of contained disruption with manageable market spillovers, while highlighting clear tail risks — particularly around energy flows, capital channels, and inflation — that would drive more sustained repricing across asset classes if escalation persists.

A summary of their viewpoints is shown below. 

Chart 1: Scenarios

Chart 2: Investment implications by asset class (base vs. tail)

Source: Russell Investments. Prepared using a review of 39 manager research reports and AI-assisted drafting tools. For information purposes only.