Rising oil prices, driven by conflict in Iran, have pushed crude back above $100 per barrel, spurring retail investors to aggressively buy oil ETFs. However, amid the fog of war, institutional investors have begun bargain-hunting in U.S. financial and industrial stocks, while focusing on European banking and defense sectors.
Over the past two weeks, the dominant themes driving global markets have been clear: surging oil prices, the blockade of the Strait of Hormuz, and uncertainty over how long the Middle East conflict will last.
Despite the U.S. administration’s decision to temporarily ease sanctions—allowing Russia to release some offshore crude to stabilize prices—international oil prices still climbed back to $100 per barrel last Friday, triggering declines across global equity markets. Attention has now turned to the duration of the Persian Gulf crisis and which asset classes may outperform amid the volatility.
“The market’s biggest headache right now is the timing game,” said Seth Meyer, Global Client Portfolio Manager at Janus Henderson Investors. “I’m not focused on the next four days, but on how the market structure will look over the next six months to a year.”
Retail investors have poured into the United States Oil Fund (USO)—an ETF that tracks the daily spot price of U.S. light crude—since the conflict escalated. According to FactSet data, since late February, oil prices and the USO fund have surged nearly 46%, while the S&P 500-tracking ETF (SPY) fell about 3.5% over the same period. Fund flows have shown extreme divergence: in the nine trading days through March 12, USO attracted nearly $1 billion in inflows, while SPY suffered net outflows of $12.6 billion.
“Everyone is watching oil prices closely, especially equity investors,” noted Paul Christopher, Head of Global Investment Strategy at Wells Fargo Investment Institute.
However, falling prices in forward contracts suggest oil traders expect prices to cool in the near future. Christopher added, “The market appears to be realizing this conflict may be short-lived. At this point, we prefer to buy U.S. stocks on dips and rotate out of the energy sector.”
He recommends shifting exposure to utilities, financials, and industrials—sectors he believes will continue to benefit from economic recovery and the AI boom. Last week, U.S. financials fell 3.4% and industrials dropped 3.2%, hurt by private credit concerns and rising Treasury yields, while utilities edged up 0.4%, offering a potential entry point for bargain hunters.
Wall Street often views geopolitical risks as triggering short-lived sell-offs that quickly fade. But the Iranian blockade of the Strait of Hormuz—a chokepoint for about one-fifth of global oil supply—is an unusual situation.
“The economic outlook is increasingly clouded by the fog of war,” emphasized Bob Schwartz, Senior Economist at Oxford Economics, in a report. He highlighted that U.S. gasoline prices have jumped nearly 20% in the past two weeks, immediately straining household budgets, especially for lower-income families.
Ahead of midterm elections and amid persistent inflation, the administration has promoted its tough stance on Iran while signing two executive orders aimed at stimulating the housing market.
Macro policy uncertainty also looms. Recent inflation data show price pressures remain stubborn, and with March energy costs soaring, investors are closely watching upcoming remarks from the Federal Reserve Chair for clues on how inflation and geopolitical conflict may influence future interest rate decisions.
Not only the U.S., but the European Central Bank is also assessing whether rate hikes are needed to counter conflict-driven inflation—a move that could hamper European growth. Although the U.S. is an oil exporter, it still faces inflation risks and interest rate uncertainty, as seen in the recent sharp rise in 10-year Treasury yields.
Despite the complex macro backdrop, institutions continue to seek clear opportunities. Janus Henderson’s Meyer pointed out that their bullish stance on Europe is based on a clear theme: “Banks and Tanks.” He stressed that Europe is pushing for banking deregulation and increasing defense-driven industrial investment, adding, “That core investment theme remains intact in Europe.”
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