US-Israel-Iran conflict: macroeconomic and investment scenarios

The US-Israel strikes against Iran raise important implications for the global economy and financial markets, and are existential for Iran’s leadership. We explore two scenarios from here: our base case of a limited escalation and contained energy price shock, and a global oil shock, with prolonged closure of the Strait of Hormuz and broader macroeconomic and market implications.

The US-Israel strikes and Iran’s retaliation carry high stakes globally and have already inflicted deep turmoil and loss of life in the region. Markets still lack clarity on the impact on Iran’s oil infrastructure, and the full extent of Iran’s response. The scale of US-Israeli operations vastly exceeds last year’s strikes, is more complex and carries more risk. The Iranian regime has already retaliated against targets across the region. The country is economically weakened by decades of sanctions, politically fragile after crackdowns on demonstrators, and has now lost key leadership figures including Supreme Leader Ali Khamenei, for which it has vowed strong retaliation.

We explore two scenarios from here: first, a limited escalation, our central scenario, with contained disruptions to global energy markets and contained implications for the world economy, and second, a more protracted, broader conflict that leads to an oil price shock.

In both the limited and more extreme scenario, we expect the oil price to revert to its recent ranges after six months

To simulate potential impacts on economic output and inflation, we modelled effects based on data spanning the past 40 years, including decades when the US was much more energy dependent than it is now. The effects are ‘stagflationary’, with economic activity tending to decrease, coupled with an upward move in inflation. The principal macroeconomic component affected would be industrial production, where energy prices are an important input cost. Importantly, in both the limited and more extreme scenario, we expect the oil price to revert to its recent ranges after six months.

Central scenario – limited escalation

We believe that our ‘contained disruption’ scenario is currently unfolding. Before the strikes, Brent crude oil reached USD 73/barrel, a seven-month high. At the time of publishing, the benchmark crude price is USD 79/barrel. When the US attacked Iran’s nuclear facilities in June 2025, oil peaked at almost USD 78/barrel before declining below USD 70/barrel. On 1 March, the OPEC+ group of key oil exporting nations agreed to release 206,000 barrels of additional supply in April.

In this limited escalation scenario, we would expect a negligible impact on US headline inflation and growth. We therefore maintain our forecast of three policy rate cuts from the Federal Reserve (Fed) this year, as the central bank looks through any very modest rise in headline inflation as a temporary impact.

We maintain our forecast of three policy rate cuts from the Fed this year

Risk scenario – oil price shock

In the second scenario – of a prolonged closure of the Strait of Hormuz by Iran and a more intense conflict – we estimate that the benchmark oil price may rise by as much as USD 50/ barrel. Around a quarter of the world’s oil flows through the Strait, which is also an important shipping route for liquefied natural gas, fertilisers, and industrial metals. At least two ships have already been hit near the Strait.

It is important to note that this extreme scenario represents a likely upper bound of oil price moves and is principally an attempt to quantify the economic impact.

In this second case, the shock would be large enough to adversely affect economic growth, inflation and the labour market. We would see headline inflation in the US averaging 3.5% over 2026 and growth decreasing to 1.2%. For the Fed, balancing the employment and inflation parts of its mandate would therefore become harder. If long-term inflation expectations remained anchored, as they were throughout the pandemic and during tariff uncertainties, we would expect the Fed to regard the effects on inflation as temporary. If the unemployment rate were to rise above 5.5%, a level that is much worse than our model indicates, the Fed would shift to an aggressive cutting strategy. Conversely, if the rise in unemployment were comparatively contained, we would expect it to favour stability over aggressive cuts.

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For other economies – especially in Asia and emerging markets in Europe, the Middle East and Africa - the risk scenario would warrant greater downward revision in our real GDP growth forecasts, and upward revisions in inflation, due to many of these economies’ dependence on energy imports – although the impact would of course vary for each economy. Such impacts would depend on the specifics of any escalation.

Asset-class implications

The prices of oil, gold, and industrial metals, have all risen, along with demand for haven assets, as the ‘stagflationary’ nature of the oil impact, namely higher inflation and lower growth risks, triggers mild risk aversion in markets. Gold is likely to outperform as an inflation risk hedge under our base scenario. A more severe ‘stagflationary’ risk scenario would further exacerbate gold gains as it would be accompanied by lower real interest rates.

Some volatility in government bond yields is likely, as markets reassess inflation expectations, growth risks and central bank interest rate responses. Some temporary haven related gains in sovereign bonds are likely if growth risks prevail. As Europe is the most dependent region on imported energy, and the European Central Bank targets Consumer Price Index (CPI) inflation, which includes energy, euro yield curves may see some temporary flattening as higher oil prices keep shorter bond yields anchored while long-end rates could fall on the risk of lower growth. US Treasury Inflation Protected Securities (TIPS) are likely to benefit and outperform nominal bonds as the prospect of slower growth reduces 10-year Treasury real yields, while breakeven inflation rises in response to higher oil prices. Like gold, a stronger ‘stagflationary’ risk case scenario would exacerbate TIPS’ gains over nominal bonds.

Rising volatility and higher oil prices should temporarily weigh on equity risk appetite

In equity markets, rising volatility and higher oil prices should temporarily weigh on risk appetite and create near-term downside risks before seeing a recovery, as the situation eventually stabilises. During previous geopolitical events that led to an oil shock, including the Iranian Revolution in 1979, the Gulf War in 1990, Second Gulf War in 2003, and Israel-US strikes against Iranian nuclear facilities in 2025, global equities have seen an average decline of 3%, followed by a recovery within 40 days on average. These averages are distorted by the extremely large oil shock (+70%) during the six-month long 1990 Gulf War that saw a nearly 18% drawdown in global equities and approximately 130 days before recovering. The effects of the oil shock will also play a key role, and favour energy-exporting economies at the expense of energy importers.

We therefore expect performance to temporarily vary, with energy sector equities outperforming and energy importing regions under comparatively more stress. In the coming days and weeks, this could put Japanese and European equity markets under pressure. US equities are likely to perform better, given the country's status as a major oil producer and the market's quality exposure in tech, communication services, healthcare and energy sectors, as are Swiss equities, which offer low volatility and defensive properties. Cyclical sectors, excluding defence firms, gold and industrial metal miners, are likely to suffer more from higher energy input costs and softer end-demand than defensive ones such as healthcare, consumer staples and utilities. We maintain our current sector and regional preferences intact under our central scenario of limited escalation. We retain a slight US underweight and Japan overweight, and favour the utilities, healthcare and materials sectors

Emerging market equities should face initial pressure as well, given their larger share of Asian corporates and dependence on energy imports. Beyond the near term, emerging market stocks should continue to outpace developed market equities under our baseline scenario of a moderate and temporary oil price rise.

Latin American markets, particularly Mexico, should be comparatively more resilient, while South Africa is likely to benefit from its gold mining exposure. India may also weather the initial flight to haven assets, but prolonged oil supply disruptions could weigh on the country’s equity market.

China’s ample oil reserves should act as a stabilising factor, even if the offshore market has traditionally reacted strongly to risk aversion and could see elevated initial volatility, with Iranian oil supplies at risk.

We maintain our moderately risk-on strategy

In currencies, oil disruptions will matter as well, alongside haven dynamics. Energy importers’ currencies should temporarily weaken while haven currencies appreciate. The Swiss franc can continue to strengthen, although the risk of intervention by the Swiss National Bank to stem any strong appreciation would rise. Long-term Swiss government bond yields may fall on haven demand. The US dollar could temporarily stabilise, supported by the country’s position as a net energy exporter, but would see gains unwind with oil prices subsequently normalising. A more severe ‘stagflationary’ scenario would sustain dollar gains.

Longer term, market reactions will depend on the length and severity of the conflict. As we currently see a scenario of limited escalation, and macroeconomic and corporate earnings data remain solid, we maintain our moderately risk-on strategy. Our portfolio positioning includes an underweight to global government bonds, an overweight to emerging market assets, and an overweight to gold as a risk hedge. We expect an increase in volatility across risk assets in the weeks ahead and are monitoring events closely. We stand ready to shift portfolio positioning swiftly as the situation evolves.