Iran Conflict: Three Scenarios for Markets

As the conflict in Iran enters its second month, uncertainty around energy prices, the global economy and financial markets remains elevated, affecting investor, business and consumer sentiment.

Disruptions in energy markets—initially driven by the halt in shipments through the Strait of Hormuz—are now extending to production. Oil producers in the Persian Gulf are forced to shut down output as storage facilities reach capacity and export routes become more limited. Refineries and petrochemical plants worldwide, particularly in Asia, are beginning to feel the impact of reduced supply.

Morgan Stanley Research now expects oil to average $80 to $90 per barrel in 2026, even if tensions ease in the coming weeks. In November 2025, when the Firm released its 2026 investment outlook, the expectation was for Brent crude to hover around $60 per barrel this year.

As a result, growth forecasts are being revised downward while inflation expectations are rising. Central banks are adjusting their policy stance in response to renewed price pressures.

“What had been a scenario of oil reverting to $65 is becoming less likely, even in the event of a resolution, because the disruption has moved beyond logistics to production,” says Martijn Rats, Morgan Stanley’s Head Commodity Research. “Even if the Strait reopens in the near term, it could take months for oil and gas production to normalize—creating a more prolonged supply shock and higher prices.”

Morgan Stanley Research outlines three potential scenarios, based on the duration of the conflict and the outlook for shipments through the Strait of Hormuz: 

Scenario 1: De-Escalation

In this scenario, shipments through the Strait of Hormuz normalize within a month, and oil prices stabilize in a range of $80 to $90 per barrel.

Risk assets would likely outperform, with cyclical sectors—like consumer discretionary, financials and industrials—leading gains, while defensive industries could lag.

“In this case, markets effectively breathe a sigh of relief,” says Morgan Stanley’s Chief Cross-Asset Strategist Serena Tang. “Investors would refocus on growth drivers like earnings resilience and AI investment. In plain terms, this is a classic ‘risk-on’ environment.”

Even so, volatility could remain elevated as markets continue to assess the risk of further geopolitical flare-ups.

In fixed income, the yield curve steepens as growth expectations improve, while the euro could strengthen against the U.S. dollar amid improving sentiment.

Scenario 2: Continued Constraints

Under this scenario, roughly 80% of tanker passage would resume within a month, but it would take up to a quarter for full normalization. Iran would retain influence on traffic through the Strait, keeping supply risks elevated. Oil prices would be around $100 to $110 per barrel for 2026.

“It’s a more complicated scenario,” Tang says. “Markets can absorb higher oil prices, but it creates friction.”  

On the economic front, policymakers would likely focus on preventing inflation expectations from going up. Many central banks could indicate delays in interest-rate cuts, and some may signal potential increases.

Equity markets could still generate gains, but with greater volatility and less conviction. Gains would be led by higher-quality companies—those with steadier earnings and stronger balance sheets—alongside select defensive industries, such as healthcare.

Scenario 3: Effective Closure

In a more severe scenario, the Strait of Hormuz remains effectively closed for several months, pushing oil prices to $150 to $180 per barrel.

Such a shock would weigh heavily on global demand, prompting policymakers to shift focus from inflation control to recession prevention. Interest rates could be reduced significantly to support growth and employment.

“Investors would move into what we describe as a ‘recession playbook,’ reducing equity exposure and increasing allocations to government bonds and cash,” Tang says.

Within equities, energy and defensive sectors such as utilities and telecoms would likely outperform as earnings risks rise. The U.S. dollar would likely strengthen against the euro, while traditional safe-haven currencies, including the Swiss franc, could also outperform.