What the Iran Conflict Means for Your Portfolio
The past couple of days have served as a timely reminder that investing in the stock market means balancing not only earnings and valuation risk, but also geopolitical risk. This past weekend, the United States and Israel launched a coordinated joint military operation against Iran – dubbed “Operation Epic Fury” by the Pentagon and “Operation Roaring Lion” by the IDF. Within hours, Iran’s Supreme Leader Ali Khamenei was dead, killed in precision strikes on a compound in the heart of Tehran, ending a tenure that began in 1989.
By Sunday morning, the conflict had already spread well beyond Iran’s borders, with Iranian retaliatory strikes reaching across the broader region. Investors who weren’t already watching this situation closely are now scrambling to understand what it means for their portfolios. The scale of what has unfolded over the last 72 hours demands a clear-eyed look at the risks and opportunities that lie ahead.
From an investor’s perspective, the critical question isn’t whether markets will be volatile – we should expect that. The question is how long this conflict lasts and whether the impacts extend beyond the Middle East and energy markets more broadly.
Unprecedented Iranian Intervention
The strikes began on February 28th and targeted officials, military commanders, and key facilities across Iran, with regime change as an explicit objective. Several of Iran’s top security officials were killed alongside Khamenei, prompting Iran to declare 40 days of national mourning. The operation represented the most significant direct US military engagement in the Middle East in over two decades, and its breadth – striking across 24 of Iran’s 31 provinces – made clear this was not a limited strike designed to send a message.
Iran’s response was swift and wide-ranging yet has generally been criticized as being miscalculated and poorly executed. Iran launched missiles and drones targeting Israel, the UAE, Qatar, Kuwait, Bahrain, Jordan, and Saudi Arabia. Explosions have continued across multiple countries, with Iran also targeting US military bases across the region. By Monday, Israel launched a fresh series of strikes in Lebanon after Hezbollah claimed responsibility for firing projectiles into northern Israel, with Israel stating that the intensity of these strikes is only set to increase.
President Trump has said that operations are “ahead of schedule,” while leaving open the possibility of diplomatic engagement with whatever leadership emerges in Tehran. The human toll is significant, the situation is still actively evolving, and the range of possible outcomes over the coming days and weeks remains unusually wide.
Iran May Shut The Strait of Hormuz
For global energy markets, all roads lead to one waterway: the Strait of Hormuz. Iran controls the northern side of that passage and has a long history of threatening to close it. The degree to which that threat becomes reality is the single most important variable in determining how severe and sustained this market disruption becomes. Roughly 20 million barrels of crude oil per day travel through the Strait of Hormuz, accounting for approximately 20% of global consumption. Any meaningful disruption in the Strait is a global economic event, not just a regional one.
For now, container travel is avoiding the Strait and markets have remained relatively calm. Container shipping giants are rerouting vessels around the southern tip of Africa; a move that stresses, but does not break global supply chains. Similarly, Brent crude oil jumped on Monday morning, but is far away from the “worst-case” kinds of prices that we’ve historically associated with conflicts in the Middle East. Furthermore, OPEC+ has indicated that it will boost oil production to help offset the disrupted oil production from the region.
Saying all that another way; for now, the risk of a broader Iranian conflict appears to have been largely priced in and big business is adapting to the conflict.
Energy Prices May Spur Inflation
While the scale of this weekend’s operations was surprising, the directionality was not. Tensions had been building visibly for weeks, and institutional investors were already repositioning – which helps explain why the initial market reaction has been more measured than the magnitude of events might suggest.
The larger concern on Wall Street is the potential inflation resurgence. The 10-year Treasury yield pushed up past 4% and traders were seen trimming their bets on 2026 rate cuts.
Energy is clearly the headline risk. Oil prices bleed through to transportation and heating costs. It’s the primary input in the production of numerous goods and services across the economy.
Right now, energy is also just one of many potential inflation pressures that are building. Three other items also deserve attention.
- Last week’s Producer Price Index release showed an increase in service price inflation, signaling that service-sector price pressures remain sticky and haven’t fully resolved.
- Tariffs will remain a sticking point. Many companies have eaten the tariff costs so far rather than passing the costs on to the consumer. Continued tariff uncertainty and the potential for new trade barriers continue to threaten higher input costs for domestic firms, and in turn, domestic consumers.
- Tax rebates are coming. An unusually large tax rebate season due to the tax cuts in the One Big Beautiful Bill functionally resembles the stimulus checks of a few years ago. This fiscal stimulus could bolster consumer demand even as supply chains come under renewed stress.
Now, while the pressures above all point to higher inflation, it’s important to note the Fed’s current rate positioning is surprisingly favorable to fight against short term inflationary pressure. Rates are still above realized inflation, giving the Fed some cushion, and their stance coming into 2026 has been relatively neutral, signaling a wait and see approach that will be data dependent.
Furthermore, the single largest inflation component, shelter, appears to be under control. It is difficult to envision a sustained re-acceleration of inflation as long as housing prices remain relatively stable. That’s not a reason for complacency – but it is a meaningful governor on how far this inflation story can realistically run.
Nonetheless, Investors who were counting on a smooth Fed pivot and multiple rate cuts in 2026 should be stress-testing that assumption right now. The prospect of multiple rate cuts later this year has diminished considerably, and the more likely scenario in the short term is probably a “hawkish hold” as the Fed monitors how these geopolitical and fiscal pressures will show up in the economic data.
Seeking Opportunities In Turmoil
Let’s be clear: the conflict is still active. The geopolitical outcomes remain highly uncertain. A broader regional escalation – particularly involving Hezbollah or a successful Iranian attempt to close the Strait – would have major market implications.
In energy, large-cap integrated producers like Exxon Mobil (XOM) and Chevron (CVX) are the most straightforward beneficiaries of continued conflict. Smaller companies with significant domestic production carrying less Strait of Hormuz exposure also stand to benefit from higher oil prices.
On the defense side, big defense companies like Lockheed Martin (LMT) or Raytheon (RTX) will likely continue to benefit from the conflict. Lockheed in particular is garnering attention as demand increases for their Patriot defense missiles. It’s also worth looking beyond the “Big Five” contractors as the growing battlefield role of drone technology means that smaller, specialized manufacturers in the unmanned systems space are seeing demand that this conflict only accelerates. The defense sector broadly was already in a multi-year spending upcycle before this weekend, and what’s unfolding now likely extends that runway further.
The Long View
History tells us that geopolitical market shocks tend to be shorter and less catastrophic than the initial headlines suggest. When Israel struck Iranian nuclear sites in June 2025, equities sold off sharply at the open – then recovered once it became clear the Strait of Hormuz wasn’t disrupted. The same pattern played out after Russia’s invasion of Ukraine in 2022, after which markets ultimately found their footing within months.
But this situation has characteristics that deserve genuine humility. The killing of Khamenei and the push for regime change is relatively new territory. Similarly, Iran trying to close the Strait of Hormuz while simultaneously trying to damage refining and port infrastructure in neighboring countries is uncharted territory. These aren’t normal inputs for the risk model.
The uncertainty also extends further out into the future. While President Trump has indicated he’s open to lifting sanctions on Iran if pragmatic new leadership emerges, there is no clear successor to Khamenei in the frame today. There is significant uncertainty around who will run Iran, and how that regime will interact with its neighbors in the Middle East. A protracted power struggle and religious unrest seems like the most likely outcome. The inference here is that the geopolitical risk premium for supply chains passing through the area will probably persist for at least a little while.
