US-Israel-Iran conflict: macroeconomic and investment scenarios

The US-Israeli strikes against Iran could have far-reaching implications for the global economy and financial markets, and existential ones for Iranian leaders. We explore two future scenarios: a baseline scenario with limited escalation and a contained energy shock; and an alternative scenario anticipating a global oil shock, with a prolonged closure of the Strait of Hormuz and broader macroeconomic and market consequences.

The US-Israeli strikes and Iranian retaliation present major global implications, sowing profound turbulence and inflicting casualties in the region. Markets are still struggling to assess their impact on Iranian oil infrastructure and to estimate the scale of Iran’s response. The scope of the US-Israeli operations far exceeds that of last year’s strikes, is more complex, and carries greater risks. The Iranian regime has already retaliated against targets across the region. The country is economically weakened by decades of sanctions and politically destabilized by the repression of protests. It has also now lost key figures in its government, including Supreme Leader Ali Khamenei, who has promised strong retaliation.

We are exploring two future scenarios: first, limited escalation—our base case—with contained disruptions to global energy markets and limited repercussions on the global economy; Secondly, a prolonged and widening conflict could lead to an oil shock.

In both the limited and more extreme scenarios, we expect Brent prices to return to their recent ranges within six months.

To simulate the potential consequences of the conflict on economic output and inflation, we modeled its effects using data spanning the last 40 years, including decades when the United States was far more energy-dependent than it is today. These effects are stagflationary, with a downward trend in economic activity coupled with rising inflation. The most affected macroeconomic component would be industrial production, for which energy prices represent a significant cost. It is worth noting that, in both the limited and more extreme scenarios, we anticipate Brent crude prices returning to their recent ranges within six months.

Basic scenario – limited escalation

We believe our “contained disruption” scenario is unfolding. Before the strikes, Brent crude had reached $73 a barrel, its highest level in seven months. As we write this, the benchmark price is $79 a barrel. During the US attacks on Iranian nuclear facilities in June 2025, it peaked at nearly $78 a barrel before falling back below $70 a barrel. On March 1, OPEC+, the group of major oil-exporting countries, agreed to increase production by an additional 206,000 barrels in April.

In our view, this limited escalation scenario would have a negligible impact on US inflation and growth. That is why we maintain our projection of three interest rate cuts by the Federal Reserve (Fed) this year, with the central bank viewing any very modest rise in overall inflation as a temporary phenomenon.

We maintain our projection of three interest rate cuts by the Federal Reserve (Fed) this year.

Risk scenario – oil shock

In the second scenario—a prolonged closure of the Strait of Hormuz by Iran and an escalation of the conflict—we estimate that the benchmark price of crude oil could rise by as much as USD 50 per barrel. Approximately a quarter of the world’s oil transits through this waterway, which is also a critical shipping route for liquefied natural gas, fertilizers, and industrial metals. At least two ships have already been struck near the strait.

It is worth noting that this extreme scenario likely represents an upper limit on oil price fluctuations and is primarily intended to quantify the economic impact.

In this second scenario, the shock would be significant enough to negatively affect economic growth, inflation, and the labor market. In the United States, we could see overall inflation averaging 3.5% in 2026 and growth slowing to 1.2%. For the Federal Reserve, balancing the employment and inflation aspects of its mandate would therefore become more challenging. If long-term inflation expectations were to remain stable, as they were throughout the pandemic and during periods of tariff uncertainty, the Fed could consider the effects on inflation as temporary. Should the unemployment rate exceed 5.5%, a level far more alarming than that indicated by our model, the Fed would then adopt an aggressive rate-cutting strategy. Conversely, if the rise in unemployment were to remain relatively contained, the central bank might favor stability over aggressive rate cuts. For other economies—particularly in Asia and emerging markets in Europe, the Middle East, and Africa—the risk scenario would justify a more substantial downward revision of our real GDP growth projections and an upward revision of inflation, due to the dependence of most of these economies on energy imports—although this impact obviously varies from one economy to another. These effects would also depend on the specifics of any potential escalation.

In equity markets, our investment strategy focuses on the healthcare, utilities, and materials sectors. Regionally, we favor Japanese equities following Prime Minister Sanae Takaichi’s landslide election victory. We maintain our overweight position in emerging market equities given their resilience and strong fundamentals, with a preference for South Korea, as well as South Africa, China, and India. South Korea and South Africa retain their superior earnings momentum, supported by significant investments in AI infrastructure and firm precious metals prices. The evolving tariff environment could also improve investor confidence in South Africa, which was previously subject to a 30% tariff. India, which faced US tariffs of 50% until the signing of a trade agreement on February 2 that reduced them to 18%, is benefiting from this recent lowering of trade barriers, an accelerating cyclical pattern, and improved market sentiment. Meanwhile, the slight improvement in tariffs applicable to China could attract more investor attention, amid attractive equity returns, rapid development of AI capabilities, and an expected earnings recovery in 2026.
Read more: US tariff policy change, risks in the Middle East: what are the consequences for the markets?

Implications for asset classes

Oil, gold, and industrial metal prices have all risen, as has demand for safe-haven assets. The stagflationary nature of oil’s impact (namely, an upside risk to inflation and a downside risk to growth) is triggering mild risk aversion in the markets. In our base-case scenario, gold should outperform as a hedge against inflation risks. A more severe stagflationary risk scenario would further enhance gold’s performance, as it would be accompanied by a decline in real interest rates.

Some volatility in government bond yields is also likely as markets reassess inflation expectations, risks to growth, and central bank interest rate responses. One-off gains linked to sovereign bond safe-haven status are likely if risks to growth prevail. Given that Europe is the region most dependent on energy imports, and that the European Central Bank targets inflation as measured by the Consumer Price Index (CPI), which includes energy, the euro area yield curve could temporarily flatten. Indeed, rising oil prices would stabilize short-term bond yields, while long-term rates could fall due to the risk of slowing growth. US Treasury Inflation-Protected Securities (TIPS) are likely to benefit from this situation and outperform nominal bonds, as the prospect of slowing growth reduces the real yields on 10-year Treasuries, even as implied inflation rises in response to higher oil prices. Similar to gold, a more pronounced stagflationary scenario would accentuate the outperformance of TIPS relative to nominal bonds.

Increased volatility and rising oil prices are expected to temporarily weigh on risk appetite and generate short-term downside risks.

In equity markets, increased volatility and rising oil prices are expected to temporarily dampen risk appetite and generate short-term downside risks, before giving way to a recovery once the situation stabilizes. In previous geopolitical events that triggered an oil shock, such as the 1979 Iranian Revolution, the 1990 Gulf War, the 2003 Second Gulf War, and the planned Israeli-American strikes against Iranian nuclear facilities in 2025, global equity markets experienced an average decline of 3%, followed by a rebound within an average of 40 days. These averages are skewed by the exceptionally large oil shock (+70%) that occurred during the 1990 Gulf War, which lasted six months and resulted in a decline of approximately 18% in global equity markets, with a delay of around 130 days before recovery. The effects of an oil shock will also play a significant role, favoring energy-exporting economies at the expense of importing ones. We therefore anticipate temporarily divergent performance, with energy sector equities outperforming and comparatively greater pressure on energy-importing regions. In the coming days and weeks, this could put pressure on Japanese and European stock markets. US equities should perform better, given the country’s status as a major oil producer and its exposure to quality stocks in the technology, communications services, healthcare, and energy sectors, as should Swiss equities, which exhibit low volatility and defensive characteristics. Cyclical sectors, with the exception of defense companies, gold mining companies, and industrial metals miners, are likely to suffer more from rising energy costs and slowing final demand than defensive sectors such as healthcare, consumer staples, and utilities. Under our base case scenario of limited escalation, we maintain our sector and regional preferences. We retain a slight underweight position in the US and an overweight position in Japan, with a focus on utilities, healthcare, and materials.

Emerging market equities are also likely to experience initial pressure, given their high proportion of Asian stocks and their reliance on energy imports. Subsequently, emerging market equities should continue to outperform developed market stocks under our base case scenario of a moderate and temporary rise in oil prices.

Latin American markets, particularly Mexico, could prove comparatively more resilient, while South Africa should benefit from its exposure to the gold mining sector. India could also overcome the initial flight to safe-haven assets, but prolonged disruptions to its oil supply could weigh on its stock market. In China, large oil reserves should play a stabilizing role, although the offshore market has traditionally reacted strongly to risk aversion and could experience high initial volatility given the threat to Iranian oil supplies.

We maintain a moderately pro-risk stance

In the foreign exchange market, oil-related disruptions will also have an impact, as will safe-haven dynamics. Currencies of energy-importing countries are expected to weaken temporarily, while safe-haven currencies will appreciate. The Swiss franc could strengthen further, although the risk of intervention by the Swiss National Bank (SNB) to contain excessive appreciation increases. Yields on long-term Swiss government bonds could fall due to safe-haven demand. The US dollar is likely to stabilize temporarily, supported by the country’s position as a net energy exporter, but its gains would then be erased with the subsequent normalization of oil prices. A more severe stagflation scenario would perpetuate the dollar’s gains.
In the longer term, the market reaction will depend on the duration and severity of the conflict. Given our current scenario of limited escalation, the strength of macroeconomic data, and corporate earnings, we maintain a moderately pro-risk stance. Our investment strategy includes an underweight position in global government bonds, an overweight position in emerging market assets, and an overweight position in gold for portfolio hedging purposes. We anticipate increased volatility in risky assets in the coming weeks and are closely monitoring developments. We are prepared to quickly adjust our positioning as the situation evolves.