How the Iran Conflict Could Reshape Portfolio Risk

Key takeaways

The U.S. airstrikes on Iran’s nuclear sites appear designed to deter proliferation without provoking full-scale conflict. Israel and Iran have since agreed to a ceasefire for now.
While Tehran has incentives to avoid escalation, internal pressure and damaged confidence may drive symbolic or asymmetric retaliation.
Three scenarios may unfold: limited retaliation (low market impact), to “weaponized uncertainty” in the Strait of Hormuz (inflationary risk), to rogue escalation (a tail-risk event).
For now, asset prices remain stable, but the return of geopolitical risk signals a more fragile and volatile investment environment ahead.

Over the weekend, the United States launched precision airstrikes on Iranian nuclear facilities, marking a dramatic escalation as it joined Israel in intensifying regional tensions.

On Monday, Iran retaliated by striking a U.S. military base in Qatar. This exchange was followed on Tuesday by a declaration of ceasefire. For now, after comments from President Trump, both Israel and Iran appear to be honoring the agreement, despite suggested violations.

In a year already marked by elevated macro uncertainty, these developments have injected a new source of geopolitical risk into markets. Understandably, investors are wondering about the potential impact on their investment portfolios. To address this topic, we review the key questions investors should focus on.

What’s the Endgame?

The U.S. strikes appear intended to avoid triggering a full-scale war. The limited scope, focusing only on Iran’s nuclear capabilities, suggests it was intended as a “one-and-done” operation aimed at deterring Iran and nudging it toward negotiations on U.S. and Israeli terms.

If that’s the goal, it’s a high-stakes gamble: disrupt Iran’s nuclear momentum enough to create leverage but avoid dragging the U.S. into a broader war in an election year.

Since the U.S. strikes, the “one-and-done” operation appears to have achieved its intended effect. However, it is an open question if Israel’s objectives have been met.

What Happens Now?

Tehran’s agreement to a ceasefire after promising to retaliate to U.S. strikes indicates their government’s rhetoric is often more about shaping perception than previewing action. As with past confrontations, what matters most is not what Iran says, but what it does.

While the situation remains highly fluid, we believe three broad scenarios are now in play. Recent ceasefire negotiations suggest that Scenario 1 is currently the most likely outcome, though this remains subject to change.

Scenario 1 – Limited Retaliation

Symbolic retaliation was the most likely near-term path. Iran sharing its plans with Qatar before the attack demonstrated an intention to de-escalate the situation. This followed a similar script to the Soleimani episode in 2020, where missile strikes appeared designed to avoid U.S. casualties.

Market Impact: Markets have rallied on the ceasefire news and oil prices have fallen below the price when Israel started its attack on Iran. If this scenario continues to play out, we would expect client portfolios to be influenced more by other factors beyond geopolitical headlines, such as growth and inflation dynamics.

Scenario 2 – Weaponized Uncertainty

We can’t rule out just yet a scenario where Iran initiates calibrated disruptions in the Strait of Hormuz. Although Iran has little incentive to fully shut the waterway unless truly cornered, it could look to cause damage by fracturing its reliability but not inflict enough damage to force retaliation from the U.S. This “weaponization of uncertainty” could move oil prices higher without a formal blockade.

Market Impact: This scenario can increase the risk of higher inflation over the coming months, reducing the appetite for central banks to cut rates. Client portfolios could be impacted through higher interest rates.

Scenario 3 – Rogue Escalation

Actions such as targeting Gulf oil infrastructure or disrupting the Strait of Hormuz would escalate tensions significantly. Shutting down Hormuz, through which ~20% of global oil flows pass, would likely trigger a sharp spike in oil prices and heighten global recession risk. However, there is no guarantee Iran has the capability to do this and to do so would mostly impact China.

Market Impact: We consider this a low probability, high impact scenario in which oil disruptions create a drag on global growth and inflation increases meaningfully. This would produce a drastic repricing of risk assets and have a material impact on client portfolios.

Tempered Response

So far, markets have not been moved much by the events in the region. Oil prices are back to pre-Israel attack levels and far from crisis levels. This suggests investors see this as a contained event with no further impact. Still, it’s likely that a geopolitical risk premium is being gradually embedded in energy prices, even without a major disruption in the oil supply.

The macro impact of a major oil shock would be global, but also uneven. As we have highlighted before, the U.S. is relatively insulated due to its domestic energy production while Europe and Asia are more vulnerable. For central banks already navigating a delicate disinflation path, another oil-driven price shock would complicate the outlook and potentially delay or reverse expected rate cuts.

As of today, the broad economic narrative remains intact. The most plausible path ahead is one of elevated uncertainty, with intermittent flare-ups that may not shift the base case but will increase volatility around it.

The Bottom Line

For now, markets are betting this conflict doesn’t spiral. That might prove right. But it’s important to recognize that geopolitical risk remains a source of volatility. Investors should keep an eye on more than just inflation prints and earnings beats – they need to get used to having more questions than answers.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.