By Jack Hough
The scale of Operation Epic Fury surprised even the military analysts who saw it coming.
Starting midmorning in Tehran on Feb. 28, U.S. and Israeli forces struck nearly 2,000 targets within 100 hours, killing Iranian leader Ayatollah Ali Khamenei and dozens of his top lieutenants. It is America's largest Middle East incursion since Operation Iraqi Freedom in 2003 -- and so far, the stock market back home has shrugged it off. Wall Street's favorite word for describing this is "resilience," which sounds a bit too heroic for an awkward investing truth: Sometimes world events are both deadly serious and unlikely to dent purchases of iPhones, Oreo cookies, and Nvidia chips.
Investors should contemplate this war's financial effects just the same. Near term, it could shift stock market leadership, or accelerate changes that were already under way. And a rising oil price adds to inflation, especially for energy importers -- behold South Korea's 16% stock plunge this past week. In the U.S., any inflation uptick could deprive investors of more interest-rate cuts. Or perhaps worse, the Federal Reserve could cut rates later this year, and depending on the circumstances, be judged by the bond market as giving President Donald Trump what he wants, but not necessarily giving the economy what it needs.
A quick and tidy exit in Iran is no sure thing. But even with one, America's balance sheet looks unprepared for a recent pattern of rising military intervention, no matter how warranted. Below, some moves that investors should consider -- and perhaps more important, skip.
Few Americans will mourn the passing of a 37-year despot who called often for their deaths and, through his worldwide network of sponsored militants, occasionally achieved them. On the first day of trading following the initial decapitation strikes, the S&P 500 index closed flat, while the price of Brent crude jumped more than 8%. Deutsche Bank called that only the 38th-largest one-day oil shock since 1990. But oil kept climbing and is now up 14%, to more than $83 a barrel.
At risk isn't just Iran's output of around three million barrels a day, which is well behind America's 13 million and Russia and Saudi Arabia's 10 million apiece but still accounts for 4% to 5% of world supply. Iran also abuts the Strait of Hormuz, a maritime chokepoint that controls access to the Persian Gulf. Here, shipping lanes that are barely as wide as Midtown Manhattan carry a fifth of the world's oil and liquefied natural gas, including from Saudi Arabia, Iraq, Kuwait, the United Arab Emirates, and Qatar. For now, they are effectively closed by threats of attacks and fleeing cargo insurers.
On Tuesday, a U.S. submarine destroyed an Iranian naval ship thousands of miles from Hormuz, in the Indian Ocean. "Quiet death," said Pete Hegseth, U.S. Secretary of Defense, or as he prefers, of War. "The first sinking of an enemy ship by a torpedo since World War II. Like in that war back when we were still the War Department, we are fighting to win."
But just what will winning look like? In announcing the attack, Trump laid out goals of destroying Iran's missiles and navy, ending its support of terrorist proxies, and preventing it from ever obtaining a nuclear weapon. He also called on Iran's people to seize their government. "It will be yours to take," he said. Days later, Trump added details on fighting duration: "We projected four to five weeks but we have capability to go far longer than that."
Byron Callan, a defense analyst at Washington, D.C.--based Capital Alpha Partners, which advises investors on government policy matters, has handicapped five possible outcomes in Iran. The most likely, with a 40% probability, is Iran left declawed, with internal strife but not a military surrender. Less likely, at 25%, is a government collapse and transition to pro-U.S. rule, or at 20%, remaining leaders striking a U.S. commercial deal, similar to what has happened in Venezuela. A cease-fire with no deal has only a 15% chance but becomes more likely if fighting drags on and the U.S. stock market crashes, according to Callan. The least likely scenario, at 5%, is that Russia or China aid Iran militarily. Russia has limited capacity, and China has deep trading ties with Iran's Gulf rivals.
One complication is that although Iran's government is unpopular at home for sowing poverty and corruption, "it is much more resilient than a lot of people in the United States think," says Laura James, senior Middle East analyst at Oxford Analytica, which provides risk assessments for clients modeled on the President's Daily Brief and is part of Barron's parent Dow Jones.
Iran's leadership has been backed for decades by the Islamic Revolutionary Guard Corps, a professional military of more than 125,000, plus a civilian paramilitary group called the Basij, with 10 million registered volunteers across virtually every town and university. These act to quickly suppress dissent. "There isn't a kind of top that can be blown off in the decapitation strategy and allow the Iranian people to go free," says James. "There isn't even an organized opposition inside the country."
In the U.S., Epic Fury's financial effects will meet mostly strong economic trends. Consumers and businesses are freely spending and investing, driving solid economic growth, notwithstanding a weak fourth-quarter reading following a 43-day government shutdown. Soaring stock and house prices have plumped up the net worth of those who own either or both. Companies are buying back gobs of their shares. Another round of tax cuts last year means that plus-size refunds are now hitting accounts. A second healthy monthly reading for something called the Purchasing Managers' Index raises the possibility that a long manufacturing slump is easing.
Pricier crude won't necessarily muck this up. Deutsche Bank notes that historically, when oil shocks prompted U.S. stock market drops of more than 15%, they tended to come with at least one of three circumstances: a 50% to 100% oil price spike, sustained over several months; a slow-moving economy tipping into or close to recession; or a sharp, hawkish pivot from the Federal Reserve to fight inflation.
None of these look likely for now. It helps that in 2001, the U.S. became an energy exporter for the first time in 70 years. Still, consumers will see higher costs. Each $10 increase in crude prices raises the inflation rate, recently 2.4%, by an estimated 0.2 to 0.4 point.
Europe, which imports more than half of its energy consumption, and Japan, which imports nearly all of it, have it rather worse. Since the beginning of last year, Vanguard Total International Stock, an exchange-traded fund of companies outside the U.S., had been doing something little seen for more than a decade: beating the S&P 500, with help from a weakening dollar. But in the two days following the start of Iran strikes, the fund dropped 5%. The dollar blipped higher on the possibility that hotter inflation will slow or stop interest-rate cuts. At Kalshi, a betting market, the odds of multiple cuts this year fell over the past week, while those of one cut or no cuts jumped.
Wall Street has been busy parsing what war in Iran might mean for U.S. stock market leadership. Morgan Stanley has studied stock factors, or characteristics, and found that in the month following past geopolitical surprises that sent oil higher, value and dividend yield have tended to shine, while growth has slumped. This is unsurprising, considering that oil majors, whose products are suddenly worth more, populate both value and dividend funds, and the largest defense contractors, which will need to reup missile stockpiles, including interceptor systems for overseas customers, pay above-average dividends.
The problem is that underneath the stock market's surface, there has already been a violent rotation this year, with leadership swinging from artificial-intelligence giants to just about everything else: value, dividends, small-caps, cyclicals, staples, and so on. An investor who now buys into, say, the Vanguard Value exchange-traded fund, which has beaten the S&P 500 by eight points in three months, pays a price that strains the definition of value: 19 times this year's projected earnings.
Barclays has looked at sectors, and found that in the year following major geopolitical risk spikes, discretionary, tech, materials, and utilities have done well, while telecom, energy, and industrials have lagged behind. The energy finding seems counterintuitive, but by Barclays' math, energy stocks are already trading as though crude were selling for more than $100 a barrel.
All of this seems frankly exhausting. Pity the retirement saver who is already chasing popular themes from robots to nuclear power, and now must re-tilt factors and sectors for war while keeping one eye on cable news. Fortunately, Barclays also finds that the regular old S&P 500 has tended to return 12% in the year following major geopolitical flare-ups, so for well-positioned investors, doing nothing is an attractive option.
Stick with broad, cheap exposure to the U.S. stock market, and a dutiful allocation overseas, where valuations are at least lower. Don't forsake bonds. The iShares Core U.S. Aggregate Bond ETF, a cheap, popular basket of Treasuries, agency issues, and high-grade corporates, has moderate interest-rate risk and yields 4.1% -- safely more than the inflation. For factor chasers, consider dividend funds, which in some cases are cheaper than value funds and provide an income cushion should the stock market falter. Schwab US Dividend Equity goes for 16 times earnings and yields 3.4%.
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