KEY POINTS
- Renewed US-Iran fighting near the Strait of Hormuz has pushed oil higher and knocked stocks lower.
- We do not think a market crash is the likely outcome, as both sides have strong reasons to avoid full-blown war.
- The bigger risk is not the fighting itself, but what higher oil prices do to inflation and interest rates.
- Traders now see better than a one-in-three chance the Federal Reserve raises rates this month, up from one in four.
The US-Iran conflict has flared up again, with attacks on ships near the Strait of Hormuz and US strikes in response. Markets took notice: the Dow fell more than 800 points, or 1.5%, just two days after hitting a record high. Naturally, investors are asking whether this could crash the market. Our answer may surprise you, but the risks are real, and one matters far more than the rest.
Risk 1: The Strait of Hormuz
The Strait of Hormuz is the world’s most important oil chokepoint, with roughly 20% of the world’s oil passing through it. Iran has attacked ships transiting the waterway, and shipping traffic has slowed.
Here is the reassuring part, though. Oil markets are not pricing in a full closure of the strait. Analysts describe the market as pricing a “new normal” of occasional flare-ups between periods of calm, not a total shutdown. That distinction matters enormously.
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Risk 2: Higher Oil Prices
Oil has climbed, with Brent crude around US$76 a barrel. But notice what happened next: prices actually fell about 2% the following day as Qatar and Pakistan worked to bring both sides back to talks.
Risk 3: Inflation Getting Worse
This is where it gets serious. Higher oil means higher petrol and transport costs, which feed straight into inflation, and inflation is already well above the Federal Reserve’s 2% target.
Risk 4: The Fed Could Raise Rates, and This Is the Big One
Here is the risk we believe investors should focus on. Traders now see a better than one-in-three chance the Fed raises interest rates this month, up from about one in four before the ceasefire collapsed. Rates currently sit at 3.50% to 3.75%.
Why does this matter more than the war headlines? Because higher rates hurt share prices directly, especially expensive growth and technology stocks. In our view, the market can shrug off geopolitical noise, but it cannot ignore the Fed. This week is critical: June inflation data lands on Tuesday, the same day new Fed Chair Kevin Warsh gives his first testimony to Congress.
Risk 5: Which Stocks Get Hit
The pain is not evenly spread. Airlines suffer as jet fuel costs jump; Delta Air Lines (NYSE:DAL) just absorbed its highest quarterly fuel bill ever. Technology and growth stocks fall if rate-hike fears build. Consumer stocks feel the pinch as households pay more at the pump. On the other side, energy producers like Occidental benefit from higher crude prices.
The Investor’s Takeaway
So will this crash the market? We think not, and here is why. Both sides have strong incentives to step back: President Trump wants low oil prices ahead of November’s midterm elections, while Iran wants relief from sanctions. Citi analysts expect both to return to negotiations within weeks, and JPMorgan says the US economy remains resilient. Markets have already proved this; stocks recovered quickly after the initial drop.
Our view: treat this as volatility, not catastrophe. The genuine danger is not the conflict itself but its knock-on effect; if oil keeps inflation high and pushes the Fed to raise rates, that is what would truly hurt shares. So watch Tuesday’s inflation figure far more closely than the war headlines. For long-term investors, sharp geopolitical dips have historically offered opportunities rather than reasons to panic, but staying diversified and holding some energy exposure makes sense right now.
