Headlines and Highlights
- Iran War drives up energy prices: The Iran War roiled global energy markets in March on concerns over current and future supply of oil and natural gas. The price of West Texas Intermediate crude, the U.S. benchmark, rose 55% during the month to $104 per barrel while the nationwide average price of gasoline increased 35% to over $4 a gallon – the highest since the aftermath of Russia’s invasion of Ukraine in 2022. The current supply worries center on Iran’s blockage of most maritime traffic using the Strait of Hormuz, through which 20% of the world’s crude oil and liquefied natural gas passes. Much of the future fear regarding energy is that the war will expand and inflict more severe damage on the Middle East oil and gas infrastructure.
- March inflation forecast over 3%: Higher energy costs are expected to push up the March inflation rate by close to a full percentage point to levels not seen since May 2024. The Inflation Nowcasting tool maintained by the Federal Reserve Bank of Cleveland predicts that the Consumer Price Index (CPI) for March will come in at an annualized rate of 3.25%, up from the 2.4% level seen in February. The Bureau of Labor Statistics will issue its initial report on March inflation on April 10. The Cleveland Fed forecasts that annualized core CPI, which excludes energy and food due to their price volatility, will be 2.6% in March, only slightly higher than the 2.5% recorded a month earlier. Along with more expensive energy, tariffs and rising health-care costs are contributing to inflationary pressures.
- War exacts toll on stocks: The final day of March was the best trading day for U.S. stocks so far this year, as all key indexes finished up 2.5% or more on news of a possible end to the Iran War. The stellar session, however, was not nearly enough to offset a month of downward pressure exerted by the Middle East fighting. The iShares Core S&P 500 ETF lost 5.0% for the month (-4.4% in 2026) while the iShares ETF representing small caps slid 5.0% in March (+0.9% year to date). Non-U.S. stocks fared even worse given the greater reliance by Europe and Asia on Middle East energy: ETFs representing international developed markets fell 7.8% in March (+1.1% YTD) and emerging markets declined 9.3% (+3.8% YTD). Higher inflation expectations pushed interest rates higher, hurting REITs (-6.3% in March, +1.3% YTD) and bonds (-1.7%, 0.1% YTD).
Chart of Interest
Sources: Morningstar, Altair Advisers
Our Views
- Our base case is that the Iran War will not evolve into a prolonged conflict. The White House has indicated that the U.S. military campaign could end within weeks, though President Trump’s national speech on April 1 injected some doubt into that timeline. A relatively short duration for the war stands to limit potential damage to energy production and allow for market recovery.
- Stock performance in March moved mostly based on optimistic or pessimistic headlines relating to the Iran War and oil prices. However, despite the volatility in March, corporate earnings are still projected to be strong: In the first quarter of 2026, analysts surveyed by FactSet project 13% year-over-year earnings growth for the S&P 500. It would be a sixth straight quarter of double-dight earnings growth.
- History suggests that stock downturns triggered by recent oil supply shocks tend to be transitory. Within a year of a negative supply-related event, the S&P 500’s total return was up 12% on average and within two years, the gain was more than 30%, according to analysis by the Capital Group of significant oil-supply disruptions since 1990.
- A relatively quick end to the war stands to relieve the energy-related uncertainties and U.S. dollar strengthening that weighed on international stocks in March. We continue to believe international developed and emerging market stocks are attractive based on valuations and earnings growth expectations that exceed those of the U.S. market.
- The likelihood of near-term higher inflation due to the energy cost spike has reduced the market’s expectations of interest-rate cuts in 2026 from two in January to zero now. We believe the Federal Reserve will make at least one rate cut in the second half of the year to continue its 2025 priority of supporting a soft U.S. jobs market.
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