The deepening conflict in West Asia is decimating strategic assets on all sides, but seems to be only cutting flesh and causing sores for global stock markets.
Clearly, the short-term outlook is bleak for the bulls, though analysts are certain that it won't end up in an endless bear trap.
Moreover, the wealth wipeout during Week 1 of the war isn't as staggering as the 2008 global financial crisis that vaporized a spine-busting $10 trillion. In other words, even if untold anarchy is loosed up on the world due to wars, it may translate to mere barbs in the heart for markets as history has shown.
In contrast, AI-driven tech bubbles can potentially cause much more mayhem than what a can of kerosene and a box of matches can do on the ground.
Consider this. When markets first opened on Monday after the US-Israel strikes on Iran, the Dow Jones Industrial Average felt a mere 0.1% of the sting. Likewise, the S&P 500 barely fell 1.2% as equities shrugged off the blow even as oil prices, gold, silver and dollar inched higher.
But a day later, investors had a change of heart and the Dow crashed 1,200 points in the opening trade. However, it rebounded sharply, and by the close, it was down just 400 points.
Gold, often considered the safe haven during crises, ironically, fell.
That said, the war did ripple through Asian and European markets, with Japan's Nikkei dropping over 3%, Germany's DAX sinking 3.4% on day one, while Korea's Kospi crashed as much as 18% in just two sessions, and India's Nifty and Sensex suffered a bloodbath. By mid-week though, they all rebounded, some even roaring back decisively.
In contrast, fears over excessive AI investments frequently force investors to furl their fingers into fists. Just last month, Indian IT stocks crashed 21% wiping out billions of dollars in wealth. On a global scale, the erosion was in excess of $2 trillion.
Wars, on the other hand, cause short-term volatility, though equity markets recover, often sharply, within 6-12 months.
According to one study that looked at over 50 major geopolitical and warlike events since the 1950s, US markets fell 7% on average at the start of a conflict only to recover one year after the onset of the war in 85% of the cases. The authors concluded that if the market follows its seven-decade pattern in the ongoing Israel-Iran war, the rout will be short-lived. Another analysis by Stock Trader's Almanac showed that S&P's average one-week drop after an initial geopolitical shock has been 1.09% since 1939.
It's interesting to see why wars don't hurt investors in the long term. Evidence shows that war-driven panic often creates temporary market dips rather than lasting bear markets with recoveries averaging roughly 27% from market bottoms. Moreover, markets rise about 12–13% one year later on average, despite interim drawdowns averaging roughly 11-12%.
During the 1990 Gulf war, US equities plunged 14.7%, but gained 27% over the following 12 months. Likewise, after the September 11 attacks, markets fell 11.6%, but recovered rapidly gaining 21% within a year.
In more recent times, the S&P gained 3.27% in the first week after Russia invaded Ukraine on February 24, 2022. After a year, though, the index was down 6.05%. The biggest one-year jump was 32.2% after the Gaza War began on October 7, 2023.
Where the market goes from here isn't clear, though volatility indexes are punching higher across the board.
Meanwhile, oil prices surged soon after the US-Israeli attack on Iran, but have since pulled back. However, anticipation is high that prices will rise in the coming weeks.
That's because the Strait of Hormuz, the crucial passageway that transports 20% of both global oil and liquefied natural gas, is literally in bandit territory. Iran accounts for roughly 5% of global oil output and JM Financial's scenario analysis, like several others including Citi, Goldman and so on, suggests a few things: limited retaliation adding $5-10 per barrel, direct damage to Iranian oil infrastructure raising prices by $10-12, disruption in Hormuz pushing crude above $90, while a broader regional conflict could take prices beyond $100-110 per barrel or even higher.
Historically though, the Strait has never been shut for prolonged periods. This time it's different, which is why oil prices surged to levels not seen in months and if they remain 15% higher for at least one quarter, it won't be pretty.
Inflation will stage a comeback hitting household finances harder, while uncertainty will kneecap the economy putting pressure on currencies, and bond yields. Central banks will be forced to resume their whatever-it-takes mode to contain the damage, while growth will be dragged down for the unpleasant ride. Yet again.
As the US Federal Reserve noted, a 10% rise in energy prices causes 0.2% inflation and reduces GDP growth by less than 0.1%. Likewise, in the Eurozone, the European Central Bank expects a 15% energy price increase to raise inflation by 0.4-0.5% and reduce GDP growth by 0.2%.
For major emerging economies, a 10% oil price rise boosts GDP for exporters like Russia by about 0.25% and Brazil by nearly 1%, while it reduces GDP for China and India by 0.5% and 0.3%, respectively. Worse, inflation in India and China will likely flare up by 0.2% with every 10% increase in oil prices. These are preliminary estimates and the higher the price increase, the sharper the impact for oil-importing countries like India.
India's buffer stocks can cover an estimated 74 days of consumption. The US move to lift the embargo on Russian crude imports on Friday should stem the supply shortage. Still, the rupee is surviving an intense moment. Just last month, the Indian currency strengthened for the first time since April 2025, gaining 1% to close at 90.07 per dollar. But the war-led oil price shock has jammed a gun against its ribs, surging past 92.
If it continues to weaken, and crude prices remain strong, it'll exert pressure on the current account deficit pegged at 1% of GDP for FY27. For, each $1 increase in crude price will add an estimated $2 billion to India's annual import bill, while a sustained $10 rise in crude prices would expand India's current account deficit by about 40-50 bps.
What's unfortunate is the timing of the Iran war and the subsequent oil price shock, coming just when India is navigating the enviable Goldilocks period, with low inflation and good growth. Headline inflation touched a historic low of 0.25% last October, and stood at 2.75% in January under a revised data series, remaining well within the RBI's 2-6% target. But higher prices may reverse those gains, not only preventing the central bank from cutting rates next month, but also delaying it from reaching the last mile back to 4%.