We began the second quarter of the year with a sense of growing tension and uncertainty over the impact of war with Iran. The de facto shutdown of the Strait of Hormuz — through which 20% of the global oil supply is shipped — continued to send oil prices soaring with inflationary results rippling throughout many sectors of the economy.
The conflict hit the one-month mark just before the quarter began and had already eroded previously historic stock market gains.
Higher energy costs layered onto already stubbornly elevated core inflation continues to deepen concerns over future monetary policy and fuels even greater volatility in the markets and beyond.
Still, many analysts are holding onto somewhat optimistic forecasts for modest growth while moderating previous growth numbers.
Staying on Course During Geopolitical Uncertainty
The U.S. economy that faced these unanticipated shocks was fairly well-positioned to weather them over the long-term despite signs of a softening labor market and sticky lingering inflation.
Unemployment remains relatively low. Wage gains have outpaced inflation for nearly three years. Other factors that could support economic strength include deferred growth from last year’s government shutdown, larger tax refunds, and solid underlying demand.
The Federal Reserve has exhibited patience as it balances inflation against labor market concerns. Entering 2026, investors expected multiple rate cuts from the Fed. But higher prices, driven by energy, have tempered those expectations and monetary policy may stay on hold longer than markets anticipated.
The stock market almost always reacts to uncertainty with fear and resultant sell-offs have brought market indices off their historic highs. Yet the markets have taken recent geopolitical developments more calmly than many forecasters might have anticipated. The belief that this was might be short-lived may have prompted investors to shift into greater diversification rather than panic into any large-scale retreat.
Modest Upside Factors
Energy stocks soared as oil prices spiked following the U.S. bombing campaign in Iran. Industrial stock tied to defense and the AI boom performed well and also led some investors into defensive stocks, leading to gains in the consumer defensive and utility sectors.
Enthusiasm for technological advances in robotics, opticals, and space exploration remains high. Recent business reporting has also expanded AI from the realm of mere speculation into realized benefits including improved efficiency, faster decision-making, and higher output, with impacts expected to strengthen further in 2026.
Analysts appear to be looking toward earnings season with cautious optimism. Credit markets remain calm, with spreads still tight and default expectations low.
Overall consumer sentiment may yet be an unknown in the face of higher costs due to inflation — especially higher prices at the gas pump. But spending remained resilient and drove solid economic growth throughout much of the last year despite tariff worries and wage and job pessimism. The belief that the conflict may not last too long, coupled with lower taxes and higher tax refunds, should have a positive effect on retail sales in Q2.
Key Factors to Consider
It’s likely that market volatility will remain elevated even if the Iran conflict reaches its conclusion. Economists will be watchful of key risks that could play out, including high oil prices leading to a slowing rate of economic growth coupled with hotter-than-expected inflation; AI stocks requiring greater growth to support high valuations; and weakening fundamentals in private credit markets.
Other considerations are the resumption of trade and tariff negotiations, a new Chair taking the reins at the Fed, and upcoming midterm elections.
Still the over-riding question as we move through the second quarter is how long the Iran war will last and what the immediate aftermath will look like.
It’s nearly a given that uncertainty will continue to affect the markets and the economy. It’s critical for you to stay invested and remain patient, sticking to a plan based upon your needs, unique financial position, risk tolerance, and investment timeline. Please don’t hesitate to contact us with any questions or comments. We hope you have a healthy and prosperous season with all the joys spring has to offer.