Iran war: How global markets are responding

It is also worth emphasising that the recent pullback has occurred from elevated levels. Following a strong year for global equities in 2025, with broad gains across regions and sectors, markets entered 2026 at historically rich valuations.[5] A period of consolidation was therefore likely even without the latest geopolitical tensions, and while indices have given back some of their recent gains, they remain well above their mid‑2025 levels.[6]

Global economic conditions remain stable despite rising tensions

The escalation in the Middle East comes at a time when the underlying global economy remains in relatively good health. Growth slowed modestly towards the end of 2025 but remains supported by robust activity in the United States, where artificial intelligence investment and falling interest rates continue to underpin consumer spending and corporate profitability.[7] This strength has provided an important buffer against geopolitical uncertainty.

The picture is more mixed elsewhere. Europe, the UK and Japan are more exposed to rising oil prices because they are significant energy importers.[8] A prolonged rise in energy costs could dampen growth in these regions, although at this stage the impact remains manageable.

Interest rate expectations have shifted modestly in response to the oil price spike. Markets are pricing in a lower likelihood of further rate cuts in the US and UK this year, while the European Central Bank may consider tightening towards the end of 2026.[9] [10] Even so, interest rates are now far more “normal” than they were during the 2022 energy crisis. This reduces the risk of the kind of sharp monetary adjustment that amplified market stress during the Ukraine invasion.

Corporate earnings reinforce this stable economic backdrop. Fourth quarter results were strong across most regions and analysts expect global earnings to continue to experience growth. Emerging markets are expected to lead the way with earnings growth close to 40%, supported by Asia ex‑Japan.[11] Valuations across most regions sit close to or above long term averages, suggesting that markets entered the current episode from a fundamentally grounded position.[12]

How long could the disruption last?

Forecasting geopolitical outcomes with precision is impossible, but market consensus is currently that the conflict is likely to represent a short to medium term shock rather than a long term systemic event. Several factors support this view.

There are economic constraints on how long the situation can continue at its current intensity. Iran faces meaningful pressure if high oil prices persist[13], while China, as a major purchaser of Iranian oil, has strong incentives to encourage de‑escalation.[14] The United States is also highly sensitive to domestic fuel costs. These dynamics make a prolonged disruption less likely.

There are also military considerations. If naval protection improves to the point where oil tankers can once again navigate the Gulf with an acceptable level of risk, prices could fall back quickly. While oil may remain higher than it would have been without the conflict, it is unlikely to remain at current elevated levels because global supply remains abundant. The current shock is therefore a disruption rather than an indication of structural shortage.

Taken together, these factors suggest a timeline measured in hopefully weeks rather than years, although markets will continue to reassess this as new information emerges.

Other significant market themes

While the Middle East dominates the headlines, two other trends have been shaping markets in recent months.

The first is the sharp sell‑off in sectors perceived to be vulnerable to artificial intelligence (AI) disruption. Software companies have been at the centre of this so‑called “AI scare trade”, with investors reassessing the sustainability of subscription models in a world where AI can automate coding and routine digital tasks.[15] The selling has since spread to wealth management, logistics, cybersecurity, consulting, education, property and insurance. This shift reflects uncertainty about how AI will reshape business models rather than any immediate evidence of earnings deterioration.

The second is stress within parts of the private credit market. After several high‑profile bankruptcies in 2025 and a wave of redemption requests in early 2026, some funds have gated withdrawals to manage liquidity.[16] These challenges appear linked to the mismatch between illiquid assets and the semi‑liquid structures marketed to retail investors, rather than a broader credit crisis. Even so, they highlight that liquidity remains a key risk factor should economic conditions deteriorate.

Looking ahead

The Iran war has introduced significant uncertainty into markets, but movements so far have been orderly and consistent with previous short term oil‑driven shocks. The global economy remains resilient, corporate earnings are strong, and inflation is broadly under control. While the situation is evolving, the current evidence points to a temporary disruption rather than a structural break in the investment environment.

If you would like to find out more or understand how we have been thinking about portfolios, read our recent AAC update.