In this piece, the Market Insights team address several of the key questions likely to be at the forefront of investors’ minds following recent developments in the Middle East.

What is your base case scenario for how long the conflict will last?

Our base case remains de-escalation, where all key stakeholders seek a near-term resolution that allows the critical Strait of Hormuz to re-open for transit. This assumption is based on our reading of the following political calculus:

• That the US president does not want an ongoing war during his rescheduled visit to China on May 14, nor rising gasoline prices and a falling stock market while heading into the midterm elections.
• Israel will comply with US requests to de-escalate in the short term, prioritising the US relationship and recognising the limits of an air-only campaign.
• That China and other Asian counterparts will pressure Iran to de-escalate once the US suspends its strikes, both due to potential problems with their own energy supply and fear of a western recession that could weaken China’s already stagnant economy.
• That Iran, having demonstrated its ability to disrupt global activity, has sufficiently reduced the likelihood of another attack in the short term.

Of course, we are humble about the weight we should place on such rational analysis. Iran’s calculus in particular is difficult to discern, and the continued deployment of US troops to the region preserves Washington’s options to escalate. Other scenarios that would extend the conflict should therefore be considered. A full set of scenarios can be found below (see Exhibit 1).

How will a prolonged conflict affect global energy prices?

The Strait of Hormuz is the crucial waterway linking the major oil producing countries of the Persian Gulf to international energy and commodity markets. Some 20 million barrels a day (mbd) of oil and petroleum products typically flow through the Strait (see Exhibit 3), accounting for a quarter of global seaborne petroleum trade. Crude oil has dominated the headlines, but the Strait is also crucial for a number of refined and related products (see Exhibit 4).

90% of all exports that travel through the Strait are destined for Asia. India and China alone account for half of all crude oil and condensate exports (see Exhibit 5), as well as 40% of liquid natural gas exports. Europe is a key buyer of refined products, purchasing a third of all diesel and jet fuel exports.

The initial impact of supply shortages has been felt most acutely in less wealthy Asian countries, where imports of refined products have fallen 35%. (J.P. Morgan Commodities Research, 2026). These countries have introduced a myriad of measures to reduce energy demand, such as switching to a four-day work week and closing schools and universities. 

There are three options that could help to mitigate the impact of the crisis:

1. Rerouting via pipe. Pipeline alternatives exist but have limited spare capacity (see Exhibit 6). Piped oil could theoretically replace 3 mbd – 5 mbd of lost seaborne oil. However, the Fujairah port terminal of the Abu Dhabi Crude Oil Pipeline (ADCOP) has been damaged. There is also the risk that exports loaded onto ships at Yanbu port on Saudi Arabia’s western coast could come under attack from Iranian-backed Houthi dissidents in Yemen were the situation to deteriorate. Currently only an additional 1.9 mbd of oil is being redirected via these routes (based on a four-day moving average as of 22 March 2026).

2. Suspension of sanctions. The US has announced a temporary suspension of sanctions on Russian and Iranian oil (12 and 19 March, respectively). Previously these two countries sold their oil outside of formal channels, primarily to China, historically at a $15 per barrel discount to the official global price (Bloomberg, 2026). Allowing Russian and Iranian oil into global markets increases ‘official’ supplies and reduces the absolute pressure on global oil prices. However, the announcement currently only captures Russian and Iranian oil that is already at sea, limiting the effectiveness of this measure. Broadening the suspension to include future production could bring another 5 mbd of seaborne crude oil sustainably into official circulation.

3. Energy switching. China and India, two key buyers of gulf liquified natural gas (LNG), retain the ability to switch back to coal-fired power generation. China’s coal power plant utilisation is currently 50% (Ember Energy, 2026). Similarly, Indian coal utilisation rates have fallen to around 66% (Carboncopy, 2025). This switch would alleviate pressure on global LNG markets, which is generally used as a cleaner substitute for power generation but does not provide an alternative for transport fuel and thus demand for oil would remain largely unaffected.

In sum, the mitigation options are likely insufficient to compensate for a complete closure of the Strait for any meaningful length of time, even when we factor in the announced releases of strategic oil reserves. Absent a solution, prices will have to rise to force demand destruction and bring global supply and demand back into alignment. However, current oil prices are only expected to reduce global oil demand by 1 mbd (J.P. Morgan Commodities Research, 2026). Prices closer to $150 per barrel may be necessary to lead to significant demand destruction.

References

Bloomberg. (2026, 2 23). Russian oil most discounted since 2023 on western sanctions. Retrieved from https://www.bloomberg.com/news/articles/2026-02-23/russian-oil-most-discounted-since-2023-on-western-sanctions

Carboncopy. (2025, 11 17). Renewable is elbowing out coal: can it continue the growth momentum? Retrieved from https://www.carboncopy.info/renewable-is-elbowing-out-coal-can-it-continue-the-growth-momentum

Ember Energy. (2026, 2 10). From baseload to flexibility: How is coals role in China changing. Retrieved from Ember Energy: https://ember-energy.org/app/uploads/2026/02/From-baseload-to-flexibility-How-is-coals-role-in-China-changing-PDF.pdf

J.P. Morgan Commodities Research. (2026, 3 19). Retrieved from https://jpmm-internal.jpmchase.net/#research.article_page&action=open&doc=GPS-5239325-0

What will be the impact on growth and inflation around the world?

Given the importance of the Strait of Hormuz in global energy markets, its closure will impact inflation and thereby affect growth.

Higher inflation and lower growth can be expected across most economies, but the impact of the energy shock depends on four main factors:

1. How dependent an economy is on fossil fuels, and whether other alternatives such as coal can be easily substituted.
2. Whether the economy is dependent on global fuel prices to obtain fuels (for example the US domestic natural gas market is contained).
3. The degree of counter-stimulus (either short-term support shielding consumers from higher energy costs or infrastructure-related packages).
4. The level of economic fragility entering the shock.

There are also two broad points that can be made before we delve into the country detail. First, in Europe at least, we are unlikely to see government support packages of anywhere near the magnitude seen in the last crisis. For example, in the UK, analysis from the Office for Budget Responsibility found that a combination of caps on energy bills and subsidies totalled a whopping 1.6% of GDP back in 2022. This time around, concerns about the level of government debt will mean that support is small and targeted. While this means household income and consumption will take the hit in the short term, it also reduces the chance of inflation getting embedded and central banks having to hike rates.

Second, the private sector is in reasonably good shape to absorb the shock. The world economy was experiencing decent momentum overall when looking at GDP growth and earnings growth. Household and corporate balance sheets were strong following over a decade of deleveraging and, on aggregate at least, European households are still sitting on sizeable savings buffers accumulated during and after the pandemic.

With these two points in mind, when looking at the US, UK and eurozone the energy shock is a net negative for all three potential scenarios outlined in Exhibit 1.

De-escalation

In the de-escalation scenario where the Strait of Hormuz reopens within a relatively short timeframe and oil falls towards $70-80 per barrel, these economies will be able to take the disruption in their stride.

The impact on US headline inflation is expected to be muted, with an increase of roughly +0.2 percentage points for the year-end estimate. The UK and eurozone will experience a bigger inflation impact (closer to a +1 percentage point increase for year-end inflation) which would upend the disinflationary process. Gas prices in the UK and eurozone are globally oriented and tied to global LNG prices. These prices have risen in response to the closure of the Strait of Hormuz and the damage caused to Qatar’s LNG infrastructure.

The growth impact in this scenario will be limited, albeit worse for the more energy import-dependent economies of the UK and eurozone than in the US. However, the eurozone’s positive economic momentum could continue to be aided by the impact of German fiscal spending and deregulation more broadly in the eurozone.

Partial de-escalation

In the partial de-escalation scenario, the conflict continues longer, and flows through the Strait of Hormuz can only partially restart due to lingering risks and uncertainty. Oil continues to trade near $100 per barrel and the resulting energy shock will lead to a more adverse effect for the UK and eurozone vs. the US.

Year-end inflation in the UK and eurozone will be around +2 percentage points higher, mostly driven by energy prices, but in this scenario core prices, as well as food prices, will increase. Such a rise in prices will hit consumer purchasing power, corporate margins and sentiment, causing growth to slow although the hit to disposable income remains much less than that experienced in 2022 (see Exhibit 7).

For the US, year-end inflation increases by around +0.5 percentage points, driven by higher prices of gasoline and energy-intensive goods. The growth hit in the US is limited as the hit to consumers’ purchasing power is largely offset by higher revenues from energy exports (shale oil and LNG). The purchasing power effect is more immediate and is a drag on the economy, but trend-growth is still attainable given fiscal spending from the One Big Beautiful Bill taking effect in 2026.

Escalation

In the escalation scenario where oil prices spike at over $150 per barrel, the UK and the eurozone are likely to experience a recession. Inflation at year-end would be +3.0-3.5 percentage points higher due to the conflict. In terms of inflation, the US will remain more insulated (+1.0 percentage point higher inflation), and the growth risks are more limited, particularly if the Administration once again looks to tax cuts to win support ahead of the midterms.

Will interest rates go up in reaction to rising inflation?

It isn’t a given that central banks should raise interest rates even though headline inflation is set to rise. All else being equal, a shock rise in the cost of some goods will depress household purchasing power, causing consumers to cut back on spending, which in turn puts downward pressure on other goods and services. In this case, the initial rise in headline inflation would prove short-lived.

However, there are two aspects that will dictate whether staying on hold is the right thing for central banks to do. First is the role of government policy. If governments yield to political pressure and restore household purchasing power, there would be less pressure on households to lean against price rises elsewhere in their expenditure basket.

Second, a short-lived shock relies on workers not asking their employers for more pay. While workers understandably want to be compensated for the rising cost of living, higher wages compound the cost problems facing firms, causing them to raise prices yet further, and a wage-price spiral ensues.

Central banks underestimated both the government response and the boldness of workers back in 2022. Inflation thus proved far from transitory, leaving the central banks behind the curve and scrambling to raise rates from what were exceptionally low levels.

However, this time we think central banks should be less worried about second-round effects (see Exhibit 9). In Europe, governments are less likely to open the fiscal purse in anywhere near the same manner that they did in 2022.

Households will on the whole bear the brunt of the higher costs. This cost pressure may not be true in the US, however, where the One Big Beautiful Bill is already set to give fiscal support in 2026 and, additionally, fiscal stimulus might prove too tempting ahead of the midterm elections.

Labour markets globally are also much weaker heading into this crisis than in 2022, so the chance of workers asking for higher pay is less obvious. The same holds for the supply side of the economy, which currently has more slack compared to the post-Covid period when pent-up demand was unleashed.

Also to note, the starting point in rates is far different now, with rates at or above neutral levels in most jurisdictions. While central banks may wish to send a signal to warn off impending problems in our core de-escalation scenario, we expect interest rates to end the year close to where they are today in the US, UK and eurozone.

Why have equity markets been so resilient?

In the first few weeks of the conflict bonds sold off sharply, especially short maturities, while the S&P 500 was down only 4%. Even the more cyclical equity markets fared relatively well, with the MSCI Europe Index down 3% and the MSCI Emerging Markets Index up 3%.

A few reasons explain this resilience in equities.

First, investors have likely been scarred from other recent geopolitical events that were equally dramatic but ultimately short-lived. Dramatically altering a position on either Liberation Day, when President Trump announced large reciprocal tariffs, or due to Trump’s ambitions to acquire the territory of Greenland would have proved inappropriate in the fullness of time.

Second, markets have repriced the expected upside pressure on inflation more than the expected downward impact on growth. We have seen cyclical sectors hold up well relative to defensive ones, while assets such as copper, and currency pairs such as AUD/USD, have also performed better than they typically do in risk-off events. Typical safe havens, such as gold, the Swiss franc, the yen and government bonds have underperformed, compared with what historical performance would have suggested.

Third, the composition of equity markets has turned more defensive in recent decades. For instance, in the Europe index, banks and healthcare stocks both have the same weighting by market cap, at about 12%. By comparison, back in 2008 the banks were about one fifth of the index, while healthcare was about 7%.

Fourth, as discussed earlier, momentum coming into this crisis was good. Most equity regions were experiencing positive revisions to their profit estimates, be it the US, Europe, emerging markets or Japan. Conceptually, higher inflation benefits equities given company revenues are reported in nominal terms. So, as long as the rise in inflation remains modest and consumption continues to rise, equities can perform well.

Fifth, stock markets are different from the economy. Some equity indices benefit from higher commodity prices, given the weight of commodity-related sectors in the index. The energy sector has been the best performing sector since the beginning of the year (Exhibit 10) and since the start of the war in most regions. Utilities have also performed well. The strong performance of these sectors ties up with the historical playbook when looking at previous oil shocks since 1970. Therefore, while Europe does not produce much oil and higher oil prices will weigh on GDP growth rather than boost it, commodity-related stocks make up as much as 13% of European equities and will drive better earnings growth. We estimate that a 10% rise in oil prices adds about +2 percentage points to the annual earnings growth of the STOXX Europe 600. The weight of commodity-related sectors is even higher for the FTSE 100 and for the MSCI Emerging Markets Index.

Should US tech stocks be perceived as a safe haven?

After a challenging start to 2026, US tech stocks have fared better since the end of February. Within the US market, the tech sector has outperformed the broad US index, and globally, US stocks have outperformed many of their regional counterparts.

Demand for higher quality companies tends to increase in periods where economic uncertainty rises. The incredibly strong balance sheets of many of the US tech giants suggest that these companies do warrant a “higher quality” definition. Following an 18-month period of quality underperformance where fundamentals were generally overlooked by the market, we see a higher quality tilt across all sectors as a prudent way to add ballast to equity portfolios, as we wrote about recently (See On the Minds of Investors: Investors seeking resilience should consider a quality bias).

We do not believe, however, that the Iranian conflict will prove to be the catalyst for another period of extended outperformance for US tech. There are three key reasons for this view.

First, recent market performance has likely been heavily influenced by investor positioning prior to this shock. Many of this year’s popular long positions have been hit especially hard (such as Korean and Japanese equities, as well as gold). At the same time, the prior underperformance of US tech (with US software names in particular down more than 20% year to date to 27 February) likely contributes to why this area of the market has been relatively resilient.

Second, as investors work through the implications of an energy shock, we expect greater focus on how supply chain disruption may add to existing cost pressures in the tech sector. Taiwan, a critical part of the semiconductor supply chain, relies on imports for almost of all its electricity, while the production of other essential materials for chip production, such as helium, is heavily concentrated in the Middle East and therefore reliant on transit through the Strait of Hormuz. The further that costs are inflated, the more challenging it becomes for tech megacaps to deliver a future return on mammoth levels of investment.

Finally, technology companies (and growth stocks more generally) have historically performed more strongly in periods of low or falling interest rates. Interest rate expectations have already repriced materially. If a pickup in inflation is coupled with a new fiscal support package then longer-term interest rates in the US could push higher, which could challenge growth stocks.

What are the lasting investment implications of the conflict?

In our view, the conflict likely compounds four key investment themes we have highlighted for some years:

• Security: Governments around the world are looking to bolster their resilience by focusing on security in all its forms - military, energy, key resources. They will now be even more committed to devoting budget to these endeavours.
• Capital turning inward: Not least due to government encouragement, investors may think more carefully about the geographic allocation of their capital and the risk premium they apply to foreign investments. This could be a significant shift in the allocation of global capital as former surplus economies deploy their capital at home.
• Dollar on a new path: The world ex-US has invested $26 trillion more into the US economy than the US has invested elsewhere. As this money is redeployed at home, we expect this flow of capital to put downward pressure on the dollar.
• New shocks for new risks: While bonds will do a good job to cushion a portfolio from demand shocks, increasingly frequent cost shocks require a greater allocation to a new set of diversifiers, such as commodities, core infrastructure, timber, transportation assets and macro hedge funds.