Why Wall Street Remains Unshaken by the Conflict in Iran

Main Insights

• For the second day in a row, U.S. stocks bounced back after an initial morning decline on Tuesday, reflecting investors’ belief that the ongoing conflict involving the U.S. and Iran is unlikely to significantly alter the positive trajectory of the American economy.

• Economists suggest that only a total shutdown of the Strait of Hormuz—a scenario considered highly improbable—would be enough to cause oil prices to rise long enough to have a lasting negative impact on U.S. inflation and economic growth.

Despite the Middle East conflict spreading to new areas each day, investor confidence remains strong and has not been shaken by these developments.

On Tuesday, stocks recovered from an early drop, mirroring the pattern seen on Monday. All major indexes initially fell by about 2.5% in the first hour of trading, but gradually regained ground to close the day with losses of less than 1%. What’s driving investors to quickly move past these geopolitical tensions and buy on the dip?

According to Morgan Stanley analysts, the greatest risk for U.S. equities in the current Middle East situation would be a sharp and sustained increase in oil prices that could threaten the economic cycle. However, they believe the U.S. is still in the early stages of an economic upswing, supported by several positive factors, so oil would have to become a significant drag to offset this momentum.

Why This Matters

Oil prices are seen as the main channel through which the Middle East conflict could affect the U.S. economy and stock market. Many analysts believe that as long as any disruptions to global oil supplies are brief, the U.S. economy can withstand higher prices and increased volatility.

Oxford Economics shares this perspective, stating that unless the Strait of Hormuz faces a severe and prolonged closure, the current favorable U.S. economic conditions are likely to persist despite the conflict.

The Strait of Hormuz, bordering Iran and linking the Persian Gulf to the Indian Ocean, is a critical chokepoint for the global economy. Roughly 20% of the world’s oil and liquefied natural gas passes through this narrow waterway, primarily en route from Gulf producers to Asian markets.

Following U.S. and Israeli military actions against Iran, shipping through the strait slowed dramatically over the weekend and was nearly halted on Tuesday after Iran announced it was closing the passage to all vessels. Oil prices surged for a second consecutive day, but gains eased after President Donald Trump stated the U.S. Navy would escort tankers through the strait if needed.

Potential Economic Impact

Oxford Economics estimates that a moderate disruption in the Strait of Hormuz lasting two months could push oil prices high enough to add 0.3 to 0.4 percentage points to U.S. inflation. This would likely heighten concerns about the effect of tariffs on consumer prices this year and could prompt the Federal Reserve to keep interest rates steady for the first half of the year. However, their models indicate that such a scenario would have minimal impact on consumer spending and would probably not derail the markets.

Only a complete and sustained closure of the strait would be enough to significantly alter the economic outlook, according to Oxford Economics. They project that a full blockade would drive Brent crude prices up to $130 per barrel—about $50 higher than recent levels. The firm currently estimates the probability of such a blockade at just 10%, and believes the risk is decreasing as Iran’s retaliatory actions expand and its resources are depleted.