Iran War: Potential Impact on Global Equities
Last week we outlined three potential outcomes for the Iran conflict—an upside case, a moderate case, and a downside case. We are providing an updated scenario table below to provide more details on the impact to stocks. The upside case is defined by a quick end to military operations, with energy production and shipments normalizing and market pricing returning toward pre-conflict levels.
In the moderate case, military operations continue for several weeks at reduced intensity before winding down. Oil prices may remain elevated, but there is no major disruption to global supplies. In that environment, risk aversion can stay higher for longer, and market leadership could remain with relative "safe-haven" assets and sectors with less exposure to energy costs. U.S. equities may outperform Europe and Asia-Pacific on a relative basis, while energy and defense-related areas tend to hold up better than energy-sensitive industries such as airlines and transportation. We view the upside and moderate scenarios as the most likely scenarios.
The downside case presents risk to portfolios with a prolonged conflict disrupting global energy supplies and pushing oil prices sharply higher for a sustained period. That would raise recession risk by squeezing household purchasing power and corporate margins while also lifting inflation, which is a particularly difficult mix for policymakers to respond to. In this scenario, the potential for deeper and more persistent drawdowns in global equities increases, more so for international stocks than U.S. stocks.
Risks for emerging-market (EM) stocks are greater than for developed markets due to the impact a weaker currency has on inflation and capital outflows. The 18% two-day decline in the South Korean KOSPI Index last week highlights the risk. Speculative stock trading, limited liquified natural gas (LNG) inventory and a weaker Korean won resulted in forced sales by speculators, causing stock market selling to snowball. Additionally, the MSCI Korea Index has over 50% exposure to two memory chip companies. The longer the conflict in Iran and energy supply disruptions last, the bigger the chance the memory chip shortage intensifies either due to restrictions on access to energy or higher energy prices.
Iran war scenarios and potential impact on global equities
Disclosures
Source: Charles Schwab, as of 3/9/2026. For illustrative purposes only.
Episodes like the current one can be uncomfortable for investors given the uncertainty and volatility that accompany them. Indeed, headlines over the last week have been spectacular—and often focused on worst-case outcomes. But we reiterate the point that making reactive changes to portfolio allocations can lead to adverse impacts. Strategically constructed, diversified portfolios are built to weather periodic geopolitical shocks like this one. History suggests equity markets would rapidly rebound when a ceasefire occurs. That said, this conflict presents meaningful downside risks, and we don't believe now is the time to aggressively add risk.
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How to think about the rise in energy prices
The rise in energy prices since the conflict started is a key input to our outlook that has changed and needs to be accounted for. Europe and Asia-Pacific are more reliant on oil and gas imports and are particularly exposed to Middle East supply disruptions. The U.S. is less exposed due to domestic energy production but is not immune to the negative impact higher global oil and gas prices can have on both consumer spending and manufacturing production.
Energy supply to international countries is currently disrupted by two main chokepoints: effective closure of traffic through the Strait of Hormuz and the shut-in of LNG production in Qatar. These chokepoints have resulted in 20% of global oil and 20% of global LNG supply being cut off. There is inventory of oil either in strategic petroleum reserves or on ships floating on the water, but there are limits to how much can be drawn down on a daily basis. It's not just energy that is disrupted – 4.5% of annual global trade also passes through the strait according to Bloomberg estimates. Fertilizer, precious metals, aluminum and cement are likely to be the most effected.
Performance of oil prices around geopolitical conflicts
Source: Charles Schwab, ICE and Macrobond as of 3/9/2026.
Chart depicts 60 trading days before and 60 trading days after the start of military conflict. For illustrative purposes only. Brent is the leading global price benchmark for Atlantic basin crude oils. Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value. Commodity-related products are also subject to unique tax implications such as additional tax forms and potentially higher tax rates on certain ETFs. Past performance is no guarantee of future results.
International stocks remain attractive
Our positive outlook for international equity exposure remains intact, predicated on several key factors including accelerating earnings, attractive valuations relative to the U.S., favorable sector exposures, and a weaker dollar. We believe these factors will support international stocks in our two most likely scenarios—either an imminent ceasefire or gradual end to the conflict. Indeed, leading indicators have been picking up supporting the acceleration in earnings expectations. The Global Manufacturing Purchasing Managers' Index (PMI) rose to a four-year high in February, with gains in new orders indicating continued growth and investment.
Global earnings could accelerate along with economic growth
Source: Charles Schwab, S&P Global and Macrobond as of 3/5/2026.
Truncated for visual purposes. The MSCI World 12-month forward EPS refers to the estimated earnings per share (EPS) of index constituents for the next 12 months. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Sector exposures also still likely favor international markets. The potential for increased defense spending globally and construction of data centers for artificial intelligence (AI) and infrastructure is likely to continue. This would likely increase opportunities for stocks in the Industrials sector. Industrials account for 20% of the MSCI EAFE Index, 21% of the MSCI European Economic and Monetary Union (EMU) Index and 27% of the MSCI Japan Index, the benchmark indexes for international developed markets, the eurozone and Japan, respectively. Emerging market (EM) stocks are tied to the growth in the buildout to support AI due to a 33% weight in Technology, as well as internet-related companies within the Communication Services and Consumer Discretionary sectors.
The U.S. dollar decline may be arrested in the near term, reducing this positive factor for the performance of international stocks, as dollar weakness improves returns for both developed market international and emerging market stocks as seen in the chart below. Once the conflict subsides, we believe dollar weakness could resume. The U.S. Federal Reserve is still expected to cut rates this year, while the European Central Bank (ECB), and Bank of England (BOE) are expected to be on hold, and the Bank of Japan (BOJ) is likely to hike rates. This could result in interest rate differentials narrowing to the detriment of the dollar. Our view of geopolitical fracturing and shift away from dollar-denominated assets remains intact and is potentially strengthened by the nearly unilateral start of the conflict in Iran.
International stocks tend to perform better when the dollar is weak
Source: Charles Schwab, MSCI, ICE and Macrobond data as of 3/6/2026.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Valuations of international stocks are still attractive relative to U.S. stocks even though developed-market valuations have risen over the past year. Valuations for emerging-market stocks remain less expensive than both developed-market international and U.S. stocks as earnings estimates for EM companies have risen faster than stock prices so far in 2026.
International stocks have lower relative valuations
Source: Charles Schwab, MSCI, Macrobond data as of 3/5/2026.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
What would change our view?
We would need to see a situation whereby the initial energy price shock was impacting fundamental macro-economic conditions and raising recession risk. Some of the things we will be monitoring include:
- A sustained disruption to global energy supplies that cause oil and gas prices to spike further and remain elevated, which could weigh on earnings expectations.
- Signs that higher energy prices are feeding into broader inflation persistence (beyond a short-lived bump), which would limit central bank flexibility.
- Tightening liquidity conditions that raise concerns about financial stability.
In sum
We continue to see international equities as strategically attractive, especially under the upside and moderate scenarios. Stocks could rapidly rebound if a ceasefire occurs. However, we don't believe now is the time to aggressively add risk; military conflicts tend to produce the unexpected. If the conflict lingers, relative performance may favor the U.S. and defensive segments within international markets. The key trigger for a more defensive stance would be a sustained, supply-driven energy shock that meaningfully lifts recession risk.
Heather O'Leary, Senior Manager, Equity Research and Strategy, contributed to this report.
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The Korea Composite Stock Price Index (KOSPI) is the index of all common stocks traded on the Stock Market Division—previously, Korea Stock Exchange—of the Korea Exchange. It is the representative stock market index of South Korea, analogous to the S&P 500 in the United States.
The MSCI Korea Index is designed to measure the performance of the large and mid cap segments of the South Korean market. The index covers about 85% of the Korean equity universe.
The J.P. Morgan Global Manufacturing PMI (Purchasing Managers' Index) is a monthly indicator of economic health for the global manufacturing sector, produced with S&P Global, ISM, and IFPSM. It surveys >10,000 purchasing executives in 32+ nations to track output, new orders, employment, and prices. A reading above 50 indicates expansion, while below 50 signals contraction.
The MSCI EMU Index (European Economic and Monetary Union) is a free-float adjusted market-capitalization index representing large and mid-cap equity performance across 10 developed market countries in the eurozone. Covering ~85% of the sector, it includes Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, and Spain.
The MSCI Japan Index measures the performance of large and mid-cap equities across the Japanese market, covering approximately 85% of the free float-adjusted market capitalization.
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