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The Iran conflict has changed a great deal in the investment landscape, and it is difficult to imagine a return to normal in the immediate future.

Fiscal pressure on governments (particularly the US), inflation sensitivity, energy chokepoints, and credit stress is beginning to take a toll on investors’ mindsets and creating anxiety.

The AI technology revolution, which had been one important driver of the stock market last year, has been dampened by events in the Persian Gulf that have driven oil and gas prices to multi decade highs. Inflation expectations have subsequently risen dramatically. While we entered 2026 expecting three interest rate cuts and a tailwind for stocks, we now face a 50% possibility of an interest rate hike by the Federal Reserve before the year’s end. Core CPI came in at 2.5% for (pre-war) February, but if oil remains near $100 for several months, it can be assumed that core inflation will move toward a minimum 4% level. In fact, the “expected” level of inflation for the year ahead is now at 5%, as derived from the TIPS bond market. Every $10 increase in oil prices translates into roughly a 0.2%-0.35% increase in inflation. At $95-$105 per barrel, stock markets tend to weaken due to falling consumer spending, rising inflation expectations, and corporate margins shrinking due to rising input costs from transportation, energy, chemicals, and manufacturing raw materials. The stock market’s optimistic behavior over the past three years has been partially based upon inflationary expectations moving consistently lower, but a large jump in inflationary expectations can impact how investors allocate their capital. The average earnings yield of the S&P 500 is around 3.5%, and inflation is currently at 2.5%, implying a “real” yield after inflation, of 1%. If inflation jumps to 4%, the “real” return of the S&P 500 goes negative. This happened most recently in 1999, 2007, 2020, and 2022, triggering corrections in the stock market. With stocks at expensive levels in general, high valuations may reverse to more normalized levels. Historically, it seems that $80 per barrel is the level around which stock investors become concerned. If oil prices come off to these levels, inflation worries should subside. Aside from the Iran war, however, we are amidst a long-term rising commodity cycle which is driving up raw material costs on both soft (agricultural) and hard (metal) commodities. Overall investment in commodities is currently low by historical standards, which may begin driving their prices higher as investor demand rises.

Headlines are currently focused on the price of oil and natural gas, and perhaps less so on the secondary and tertiary inflationary effects of rising prices in the byproducts of these hydrocarbons. For example, 20% of the world’s liquefied natural gas comes from Qatar, whose production and distribution has been frozen due to the closure of the Hormuz Strait. Natural gas is the primary feedstock and energy source for producing nitrogen-based fertilizers, and fertilizer is a major input in the production of food. Qatar is also the dominant producer of helium in the Gulf region, responsible for about a third of the world’s supply. Helium is used in the manufacture of semiconductors as well as MRI medical scanners, and helium prices are up some 50-70% since the start of the war.

The $1.5 trillion in committed AI infrastructure spending by major tech companies is built on an assumption of a functional global supply chain, which the Iran conflict has fundamentally broken. If the semiconductor supply chain is impacted by the Iran war, headwinds may develop to the burgeoning and nascent AI industry. Data centers require massive amounts of energy to run, and oil and gasoline have increased in price by some 40%

since the start of the war. U.S. natural gas, abundant on this continent, is up so far only 5%, but electricity is usually the last major energy price to move after a geopolitical shock with a 6–12-month lag. For the rest of the world, however, natural gas prices are up some 40-60%, which will impact the cost of imported goods in the very near future.

Financial markets can currently be framed through three lenses:

• The fiscal and deficit pressures on the US government as we bump against the political limits of a need for higher interest rates to fight inflation. The current administration has prioritized tax cuts and wars at the risk of a ballooning deficit, which is taking its toll on the bond market. Ten-year bond yields have risen by nearly half of one percent since the start of the war due to higher inflation expectations, fewer expected rate cuts, expectations of large war deficits, and heavy treasury bond issuance. Higher bond yields tighten credit conditions and are bad for the economy. The Federal deficit of the United States bypassed $39 trillion in March. The current average interest rate on total outstanding treasury debt is around 3.37%. The projected budget outlay for interest costs on that debt is now estimated at $1.75 trillion per year, making interest payments the second largest federal expense after Social Security. If rates rise to 5%, this figure could rise to $1.95 trillion per year, or over 10% of the entire US GDP.

• Energy prices and shipping/trucking related inflation transmission, as well as rising raw material costs. It’s difficult to say at this point where the Iran war will lead oil prices. The 12 month rate-of-change at current prices is above 50%, and historically, levels above 50% precede stock market pullbacks.

• Private credit market stress fractures and its implications on the broader financial markets. The private credit market consists of loans made by non-banks such as funds and “business development companies” which are not as regulated as banks, particularly after banks underwent a tightening of their regulations and credit standards after the great financial crisis of 2008. This market has grown in recent years to $1.7 trillion.

Most of the loans generated by these entities are floating rate loans, and because interest rates have risen in the last five years, borrowers of these loans have seen their interest payments double, from an average of 6% in 2021 to 11%-13% now. Private credit lenders often fund companies that have lower credit ratings, i.e., companies that already have high levels of debt, cannot get regular bank loans, and depend upon continued economic growth. Unlike publicly traded bonds, private credit loans’ values are marked by the funds that hold them, so losses appear slowly, even when companies are struggling to repay them. When this occurs, lenders often extend the loan, which adds more debt, and they avoid recognizing losses. Many of these loans were issued in 2021 and 2022, and will mature this and next year, meaning that borrowers must now refinance at much higher rates, potentially triggering defaults. Private credit funds such as Ares Management, Apollo Management, or Blue Owl Capital have already begun halting or restricting withdrawals to investors who wish to sell out of these investments, which may lead to these funds selling their loans at a discount, pushing down valuations across the market. These losses are spreading to the pension funds, insurance companies, and private equity firms who are the main investors in them.

The danger presented by the private credit market is that it is now larger than the US high yield bond market before the 2008 crisis, but much less transparent. Because the loans are illiquid, credit problems can remain invisible for a long time and then surface suddenly. A breakdown in this market would trigger a collapse in credit availability for mid-sized companies and increase recession risk in the overall economy.

Bonds are now positively correlated to stocks and have been for several years. Traditionally, bonds were used in portfolio construction to offset the risk of stocks, mostly rising when stocks fell. In today’s market, asset classes like bonds, precious metals and bitcoin are not fulfilling their role of adequately diversifying portfolios, as they are all positively correlated to stocks at 0.3, 0.25, and 0.53 respectively.

In an inflationary environment, value stocks generally outperform relative to growth stocks, and materials, energy, and the utility sector tend to hold their value better than others. Despite the turbulent geopolitical environment, Wall Street analysts have been raising their earnings estimates for 2026 and 2027, particularly for AI -related companies. It should be noted, however, that earnings estimates often begin optimistically and are revised downward as the year progresses. AI is a very energy intensive industry, and with oil at $100 per barrel, it is quite possible that this may play out as the year progresses. Commodities, be they agricultural or metal-related, tend to perform well during inflationary times.