Geopolitical shocks have a way of arriving without warning. The current conflict, dubbed “Operation Epic Fury”, involving Iran, the United States, and Israel has quickly reminded investors how interconnected global markets and global politics can be. Although the U.S. has used its far superior arsenal to severely weaken Iran’s government, military and infrastructure it’s the Strait of Hormuz that is causing concern globally. With more than 20% of the world’s oil and liquefied natural gas passing through this narrow corridor (a shipping lane only 4km wide!) off the coast of Iran it was obvious that any disruption in the Strait would push energy prices higher. With tanker traffic now at a stand still anyone that has filled up at the pump this month has already seen it happening.
Events like this can unsettle markets. Higher energy prices raise costs for businesses and consumers alike, increasing the risk of inflation and complicating the outlook for central banks. Investors respond quickly to these risks, often pushing markets lower as they reassess economic growth and corporate earnings expectations. Volatility rises, headlines grow more alarming, and uncertainty rises.
Before drawing conclusions about how this conflict might impact markets over the long term, it’s worth remembering.
Markets Entered 2026 in a Strong Position
Coming into 2026, the global economy and financial markets were on fairly solid footing. Equity markets have delivered strong returns over the past several years, supported by resilient economic growth, moderating inflation, and healthy corporate earnings. While markets had already enjoyed a powerful run, the underlying drivers of growth were still very much in place.
Corporate investment has been one of those drivers. Companies are spending enormous sums to build the infrastructure behind artificial intelligence including data centers, computing capacity, and new software ecosystems. This wave of investment is expected to support productivity and economic growth for years to come.
Fiscal policy has also been playing an important role. Governments around the world are running large deficits. While persistent deficits can create challenges in the long run, in the short term, they act as a powerful form of economic stimulus. Public spending supports demand, investment, and employment across the economy.
The United States is a good example. The recently passed One Big Beautiful Bill is expected to inject hundreds of billions of dollars into the economy each year over the next several years. That kind of fiscal support provides an additional tailwind for growth and corporate earnings.
Most economists also saw positive, if unspectacular. economic growth for the year ahead. Coupled with relatively tame inflation, interest rates that were stable to falling
seemed likely for most global economies.
Taken together—strong investment, supportive fiscal policy, stimulative interest rates and resilient earnings—the economic backdrop entering 2026 was broadly constructive for markets.
Is inflation back on the table?
Energy prices play a critical role in inflation. When energy prices rise, those increases eventually ripple through the economy— showing up in transportation and manufacturing costs and, eventually, in the prices consumers pay for goods and services. With oil prices spiking in March, we’ve already seen this in higher gasoline prices, and airlines have begun discussing fuel surcharges.
Higher interest rates are the main tool that central banks have to keep inflation in check. The price of oil (WTI) rose over 70% from the start of the year to mid-March, approaching
$100 a barrel. If this persists, inflation will likely rise as well, making rate cuts less likely and increasing the chance that rates stay higher for longer.
High inflation and interest rates tend to be negative for markets. As interest rates rise, economic growth and corporate profits slow, and other assets, like bonds, start to look more attractive. Unfortunately, we have a clear, recent example of what high inflation can do to markets. The chart below shows the run-away inflation we experienced after the pandemic. U.S. Interest rates went form 0.25% in March 2022 to 5.00% one year later, contributing to a roughly 25% decline in the S&P 500 during the first nine months of 2022. The good news is that once the market became convinced that inflation was returning towards trend, it recovered quickly. Investors that panic-sold stocks early in 2022 would have had to be nimble to get back in before markets reached new highs.
We are highly unlikely to see a spike in inflation as severe as the one we saw after COVID due to this conflict, although the fear of inflation will likely increase volatility. There is also reason to believe this crisis could be short lived. Countries surrounding the Persian Gulf are highly incentivized to ensure the Strait of Hormuz remains open. It’s also not in the U.S. government’s interest to see inflation rise by even a percent or two heading into the midterm elections.
What History Teaches Us
History offers a useful reminder in moments like this: geopolitical shocks rarely leave a lasting mark on long-term market returns. Markets have navigated wars, political crises, and energy shocks many times before. While these events can trigger sharp short-term reactions, their effects often fade faster than investors expect. Businesses adapt, supply chains shift, and markets eventually refocus on the fundamentals—corporate earnings, innovation, productivity, and economic growth.
In fact, periods of heightened fear can sometimes create opportunities. When uncertainty peaks, markets occasionally experience broad-based selloffs that temporarily push prices below their fundamental value. For disciplined long-term investors, those moments can be an opportunity to rebalance and add to equities at more attractive prices. We’ve seen two such examples just this decade with the pandemic selloff and the announcement of sweeping tariffs last April in the U.S. We haven’t seen such a broad-based opportunity yet during this conflict as market reactions have been relatively muted thus far.
One of the most valuable lessons investors can learn from history is that markets tend to move forward—even during uncertain times. During periods of heightened uncertainty, it can help to step back from the daily news cycle and keep your eyes on the horizon. Short-term volatility can feel uncomfortable, but it rarely changes the long-term trajectory of markets. Staying focused on long-term goals—rather than short-term noise—often makes navigating these periods much easier.
Source: FactSet, NBC Economics and Strategy National
Scott Blair, CFA
Head Portfolio Manager
National Bank Financial – Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under licence by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).