For markets, the Iran war’s impact on oil prices is quickly creating significant uncertainty. With shipping through the Strait of Hormuz—a narrow but vital route that typically carries about one-fifth of the world’s petroleum—severely disrupted, oil prices have jumped above $100 a barrel, reviving inflation fears and shaking markets. What happens next depends less on today’s headlines than on how long the disruption lasts and how far it spreads.
Here’s what investors should know about the potential impact on markets, the U.S. economy and the U.S. mid-term elections.
Limited Equity Market Impact Historically
Historically, sudden external shocks, such as wars, pandemics or energy crises, are often short-lived, with limited long-term equity market consequences, despite initial volatility. In fact, Morgan Stanley analysis found that over the past 75 years, the benchmark S&P 500 Index has risen 8.4%, on average, in the 12 months that followed such events.
In this case, U.S. equities have been relatively steady, helped by strong energy-sector performance and global investors shifting into U.S. assets. International stocks have been weaker, suggesting investors see Europe and parts of Asian economies as more exposed to higher fuel costs.
Inflation Risk
Higher energy prices can meaningfully lift headline inflation in the near term, but the real risk is persistence. If oil prices remain elevated long enough to seep into inflation expectations—or broaden into core price pressures via transport, logistics and input costs—the Federal Reserve’s job becomes harder, as it must likely keep rates higher for longer to restrain inflation while seeking to avoid unnecessary damage to economic growth.
Still, it’s worth noting that the U.S. economy today is more insulated from oil shocks than in past decades, which is being reflected in U.S. market resilience. The U.S. is now a net energy exporter and the top oil-producing country in the world. Its oil consumption per unit of economic output has fallen by almost 70% since 1980, and consumer spending on energy is now just one-third of what it was in the late 1970s.
Midterm Uncertainty
Even so, gasoline prices remain a highly visible barometer of affordability, particularly in a U.S. midterm election year. Historically, the sitting president’s party tends to lose seats in the House of Representatives in midterm elections—a trend we anticipate continuing in 2026—and the current environment raises the risk that higher gasoline prices become a central voter concern.
That puts added focus on what Washington can realistically do to bring relief before campaigns fully intensify. President Trump has pointed to steps to boost oil supply, but with U.S. rig counts down significantly in the past few years, producers may only be able to add output at the margin, and any meaningful response could take months.
The administration is also pursuing more immediate measures, including Strategic Petroleum Reserve releases and tanker-support policies such as naval escorts through the Strait of Hormuz, alongside a short waiver allowing India to resume some Russian oil purchases. Still, because these measures are mostly temporary and small relative to the global oil market, they may have only a limited impact on energy prices
Higher Borrowing Costs
Meanwhile, the Middle East conflict may strengthen the case for significantly higher U.S. defense spending. The current administration’s proposed increase, combined with reports of rapid early wartime munitions use, could spur additional supplemental spending.
Over time, that mix can pressure U.S. debt and deficits, and potentially push long-term Treasury yields higher as investors demand more compensation to hold longer-maturity bonds. Higher yields could lead to higher borrowing costs and become a potential headwind for stock and bond markets alike.
Bottom Line for Investors
Amid the conflict, investors should stay anchored to long-term goals while recognizing where pressure points and opportunities may be building. History suggests equity volatility driven by geopolitics is often temporary, which makes the case against rushed, emotion-driven portfolio shifts. At the same time, a sustained oil shock could keep inflation risks alive and complicate the Fed’s path, making diversification more important.
Within equities, defense contractors and related technologies, including drones, satellites and missile defense, may benefit from increased military spending momentum.
Your Morgan Stanley Financial Advisor can help you stay informed about geopolitical developments and their potential portfolio implications.
To learn more, ask your Financial Advisor for a copy of the report US Policy Pulse: America, Iran and the Midterm Elections from Morgan Stanley’s Global Investment Office.
