U.S.-Iran War Heats Up: Stock Market, Economy Sectors to Watch

A $60B Vote of Confidence

The U.S.-Iran war is heating up, with the U.S. completing its 10th straight night of strikes against Iran. The conflict has significant implications for the global economy, including energy prices and consumer spending. Economists are warning of a potential recession if the conflict continues to escalate.

The S&P 500 has been relatively unaffected by the war, but economists are concerned about the impact on energy prices. Brent crude briefly topped $90 a barrel on Monday, and the U.S. 10-year Treasury yield traded above 4.6% on Monday. If crude and the 10-year Treasury yield continue to rise, Wall Street might have to start pricing in changes to inflation expectations and monetary policy that will eventually hit a company's bottom line.

The energy sector and logistics companies that rely on fuel are likely to be the biggest laggards. Ryanair, for example, said on Monday that its weak first-quarter profits reflected delayed bookings because of the Middle East crisis. The region will be carefully watched for any escalation that deters passage through the Strait of Hormuz.

Marko Papic, macro and geopolitical strategist at BCA Research, said he's keeping an eye on whether Iran's hardliners gain more power, or if the U.S. increases the number of troops sent to the Middle East. Others, however, remain confident in the market, expecting the geopolitical outlook will only improve in the second half of the year.

JPMorgan's Mislav Matejka said he's sticking to the playbook he's had since the latter half of March — one in which he uses the rising conflict to continue adding to the dips. "We continue to believe that investors should use the dips driven by geopolitical head-lines to add exposure," Matejka wrote earlier this month. "We believe the market has become increasingly adept at pricing geopolitical risk as transitory."

Why Consumers Are Worried

Economists are concerned about what a potential rebound in fuel prices as a result of the ramp-up in fighting will mean for U.S. consumers and the businesses that serve them. "There's nothing but downside here for the U.S. and global economies," said Mark Zandi, chief economist at Moody's Analytics. "Obviously, a lot depends on exactly how this all plays out and what it means for oil and other commodity prices. But it's all downside."

The average American household has lost around $1,100 so far from the war, a figure that includes increasing energy costs and higher military expenses, according to Zandi. That's resulted in real disposable income coming in either negative or near flat on an annual basis over recent months, which Zandi said is typically seen during recessionary periods.

The Road Ahead

The U.S.-Iran war is a complex and multifaceted issue, with significant implications for the global economy. Economists are warning of a potential recession if the conflict continues to escalate, and consumers are worried about the impact on fuel prices. The region will be carefully watched for any escalation that deters passage through the Strait of Hormuz.