Iran and the Strait That Moves Markets
Oil, Fertilizer and the Next Phase of Inflation
For much of the past decade, markets benefited from a powerful tailwind: low inflation, low interest rates, abundant liquidity, and a narrow group of mega-cap technology companies doing much of the heavy lifting as investors focused on artificial intelligence. That backdrop, which accelerated after the release of OpenAI’s ChatGPT in late 2022, allowed portfolios to perform well with relatively little friction and rewarded concentration in long-duration growth assets.
Today’s environment looks different. The Magnificent Seven proxy, measured by the Roundhill MAGS ETF, has fallen roughly 20% from its October peak, while major U.S. stock indices just experienced their weakest quarter since 2022. Even dominant leadership can pause when the cost of capital rises. Between lingering post-COVID distortions, the Russia–Ukraine war, tariff tensions, and now the Iran conflict affecting oil, natural gas, and fertilizer supply chains, the global economy has absorbed a steady drumbeat of supply shocks. Each reinforces a simple reality: inflation may remain more persistent than many expected even a year ago.
The Cost of Capital Matters Again
Jon here. My biggest concern after a turbulent Q1 and heading into the second month of the U.S.–Iran conflict is not volatility itself, but complacency around elevated valuations led by mega-cap tech at a time when inflation pressures, energy supply risks, and gradually widening credit spreads suggest the cost of capital may remain higher for longer. Whether we see a quick policy pivot from a Trump Put or the so-called TACO trade remains uncertain, though headlines today note “Trump could end war without reopening the Strait of Hormuz.” Perhaps POTUS has midterms on his mind. With both sides trading allegations, the backdrop increasingly resembles an old-fashioned Western standoff, where positioning matters more than rhetoric and outcomes often take longer than markets expect.
We are not forecasting a recession or major bear market in 2026. The next phase of the cycle may rely more on earnings growth than multiple expansion as supply pressures gradually ease. That would be consistent with a typical mid-cycle environment as this bull market moves into year four. As we cover below, the average war or geopolitical drawdown has been about 5% going back to Pearl Harbor in 1941.
If the war continues and disruptions in oil and fertilizer supply persist for several months, inflation may remain closer to the 4–5% range than many forecasts assume. That could delay rate cuts, keep borrowing costs and mortgage rates elevated, and lead to a more uneven market path than the past several years. Earnings can still grow, but returns may normalize with broader participation beyond mega-cap technology.
A reasonable base case includes periodic drawdowns tied to headline risk, followed by stabilization by Q4 as visibility improves. Environments like this have historically produced mid-to-high single-digit returns for the S&P 500 rather than the outsized gains investors experienced in recent years. The easy money phase of this cycle may be behind us, but opportunity remains for disciplined investors.
As I noted recently in CNBC’s “Should You Buy the Dip,” volatility often rewards investors who add exposure gradually through diversified portfolios rather than waiting for perfect clarity or attempting to time the market.
Earnings Do Not Exist in a Vacuum
Consensus forecasts recently cited by Goldman Sachs still point to roughly 12% year-over-year S&P 500 earnings growth this quarter, marking a sixth consecutive quarter of double-digit expansion. That outlook may prove achievable, but earnings rarely operate in isolation. If energy and fertilizer disruptions persist alongside evolving tariff pressures, input costs could begin to weigh on margins later in the year, from food production to transportation, complicating what currently appears to be a relatively smooth earnings outlook.
Markets may ultimately look through the conflict. Timing is less certain. If disruption in the Strait of Hormuz extends beyond a few months and it takes the rest of the year for supply side spikes to subside, 2026 may reward a more tactical and diversified approach than assuming mega-cap leadership quickly resumes as if the past few years simply repeat.
Iran and the Strait: This Is a Duration Story
Markets handled COVID quickly because it was primarily a demand shock. Once economies reopened, activity snapped back and markets recovered in roughly 90 days, even as inflation later rose due to billions of dollars in government stimulus checks and supply bottlenecks.
Energy shocks behave differently. Production cannot instantly increase, shipping routes cannot instantly normalize, and geopolitical negotiations rarely resolve in a single quarter. Oil markets historically do not reset in 60–90 days because supply chains, insurance costs, infrastructure risks, and pricing mechanisms take time to adjust.
The International Energy Agency has described the Iran disruption as one of the most significant oil supply shocks in modern market structure. Roughly 20% of global oil supply passes through the Strait of Hormuz, a chokepoint that influences transportation costs, manufacturing inputs, airline economics, and ultimately consumer prices.
Less appreciated is fertilizer. Nitrogen-based fertilizers depend heavily on natural gas and global shipping routes, with roughly 30% of traded supply moving through corridors tied to the same region. Unlike oil, there is no meaningful strategic reserve of fertilizer for countries to tap during disruptions. Shortages may not immediately appear in energy markets, but they often surface later through higher agricultural input costs, putting upward pressure on food prices and inflation.
Energy inflation often feeds food inflation. Markets can absorb a spike. They struggle more with uncertainty around duration. If disruptions persist for several quarters, investors may need to adjust expectations for inflation that settles modestly above the 3%-4% range, delayed interest rate cuts, moderately higher borrowing costs, and somewhat lower valuation multiples for assets sensitive to interest rates.
History Suggests Markets Recover
Most geopolitical shocks have historically produced modest market drawdowns averaging roughly 4.4%, with recoveries often occurring within weeks once uncertainty begins to fade. (see chart). Markets are resilient because economies adapt and capital reallocates quickly.
Energy disruptions are different. When supply chains for critical inputs are threatened, markets must recalibrate assumptions around inflation, growth, and policy. That process tends to take longer than the typical headline-driven selloff.
During Iraq’s invasion of Kuwait in 1990, oil prices nearly doubled from about $17 to the mid-$30s per barrel in just a few months. (Source: EIA) The S&P 500 required roughly 71 days to reach a bottom as investors adjusted expectations for inflation, interest rates, and economic growth. (see chart) That episode highlights the distinction between a shock driven by uncertainty and one driven by supply constraints.
Markets historically recover from geopolitical events. They often take longer when inflation expectations move higher and the cost of capital rises. Today’s environment increasingly resembles a fundamentals-driven market rather than one supported primarily by liquidity. Liquidity cushions volatility. Supply shocks force repricing.
Cheap Risk Is Gone
The prior environment rewarded concentration. Mega-cap technology, private markets, software multiples, and long-duration assets benefited from falling discount rates and abundant liquidity. Valuations expanded as capital became cheaper and investors became comfortable paying more for future growth.
Today, the cost of capital matters again. Supply shocks tend to constrain growth while keeping price pressures elevated. That combination limits how quickly central banks can ease policy and tends to increase volatility across both equities and fixed income markets.
Diversification becomes more important when traditional hedges move together. Recently, equities, long-duration bonds, private credit, gold, and even digital assets have experienced periods of synchronized volatility as markets adjust expectations for interest rates and economic growth.
Diversification has not failed. It is simply operating in a more complex environment.
The Rotation Is Already Underway
The AI investment cycle is real, but it is capital intensive. Data centers require electricity infrastructure, semiconductor production requires fabrication capacity, supply chains require redundancy, and energy security requires investment.
Innovation continues, but increasingly intersects with the physical economy.
Market leadership appears to be gradually broadening beyond the narrow group of companies that dominated recent returns. Industrial firms tied to infrastructure, utilities linked to power demand, materials supporting supply chain resilience, and energy producers benefiting from constrained supply are all seeing renewed investor attention.
We have discussed this shift as part of the ongoing rotation toward areas sometimes described as the HALO trade: heavy assets, low obsolescence sectors positioned to benefit from capital investment and real economy demand. Less concentration often leads to more durable participation across markets over time.
Annual Stock Market Volatility
This year’s volatility has already pushed the VIX fear index back toward the low-20s, a reminder that markets can quickly reprice risk when inflation and geopolitical uncertainty intersect. Volatility spikes often feel unusual in the moment, but history suggests they are a normal part of the investing cycle.
Since 1980, the S&P 500 has experienced an average intra-year decline of roughly 14%, yet has still finished positive in most calendar years. (see chart) Markets rarely move straight up, even during strong periods of economic growth. Pullbacks are common and often represent the price investors pay for long-term returns.
The catalyst, however, matters. When volatility is tied to energy supply disruptions or inflation pressures, the recovery path can take longer than typical mid-cycle declines. The destination may still be higher over time, but the path is often less smooth when supply shocks influence both prices and policy expectations.
Portfolio Construction Matters More Than Headlines
Investing is not about predicting geopolitical developments. It is about preparing portfolios for a wider range of outcomes.
Periods of uncertainty tend to reward diversification across asset classes, balanced exposure across sectors, disciplined rebalancing, and attention to valuation sensitivity. Markets often move forward once expectations become realistic rather than perfect.
The environment ahead may include greater dispersion across sectors, more modest index-level returns, and somewhat higher sensitivity to interest rates than investors became accustomed to during the liquidity-driven years following the pandemic.
None of those conditions prevent long-term progress. They simply require a more deliberate approach.
Bottom Line
Markets have historically recovered from geopolitical shocks, but they tend to take longer when disruptions affect energy supply and inflation expectations simultaneously. Iran and the Strait: If oil and fertilizer pressures persist for several quarters, inflation may prove somewhat stickier than expected, limiting the pace of rate cuts and creating a more uneven market environment than investors experienced during the past three years.
This is not a call for pessimism. The U.S. economy remains relatively resilient, corporate earnings expectations remain positive, and innovation continues to support long-term growth.
It is simply a reminder that easy environments driven primarily by liquidity and multiple expansion do not last indefinitely. Periods requiring greater selectivity often follow, and disciplined portfolio construction becomes increasingly important when the range of potential outcomes widens.
Successful investing has always involved adapting to changing conditions while maintaining a process designed to weather uncertainty that often feels more uncomfortable in real time than it appears in hindsight.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV. or call (561) 210-7887.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
