Market Update: Escalation in the Middle East
Markets & Economy
For investors, we are primarily focused on the potential for heightened volatility and the potential ramifications of the Middle East conflict on oil markets. Geopolitical events tend to have short (albeit sometimes sharp) impacts on the market, but the market also tends to recover long before the conflict is settled. The U.S. energy implications are also far lower than in previous conflicts. In our view, investors should look through any volatility and keep their focus on the long term.
Markets Move Past Geopolitical Events
Markets tend to move past geopolitical events more quickly than investors expect. While headlines can spark sharp selloff, history shows that markets often recover within days or weeks as the initial uncertainty fades. For example, after the 2003 U.S. invasion of Iraq, the market recovered its losses in just 15 trading days. Even broader and more complex events like the 2014 rise of ISIS or the 2019 tanker attacks in the Strait of Hormuz led to recoveries in less than a month.
With each new crisis, investors ask the same question: “Is this time different?” In some ways, it always is. Every event has its own set of risks and ripple effects that can extend well beyond the headlines. Nevertheless, they generally follow a familiar pattern. Unless a conflict meaningfully disrupts energy supply, global trade, or the financial system, markets tend to look through the noise and refocus on the fundamentals: earnings, inflation, and interest rates.
We've seen this dynamic recently. Following the Hamas attack on Israel in October 2023, markets initially stumbled but recovered quickly, despite tensions remaining high. Investors tend to discount the worst possible outcome initially then adjust as new information mitigates the perceived risk. These examples are a useful reminder that, while geopolitical shocks demand attention, they rarely alter the long-term investment outlook.
The Threat of Oil Spikes Are Less Impactful Today
Rising tensions in the Middle East can threaten global energy supply. Conflicts in the region often involve key oil producers or infrastructure like refineries, pipelines, and shipping lanes. Disruptions can lead to short-term spikes in oil prices, and in past decades, prolonged events were sometimes enough to spark broader economic slowdowns. But today, the global economy, especially the U.S. economy, is more resilient.
The U.S. is now a net exporter of petroleum products and the largest producer of oil in the world. That does not eliminate the impact of global price swings, but it reduces the risk of domestic shortages and provides a cushion when supply is strained. It also means parts of the U.S. economy, particularly in energy-producing regions, can benefit from higher prices through increased investment and export demand.
At the household level, gasoline and other fuel costs now account for just 2.2% of personal consumption, down sharply from prior decades. Better fuel efficiency, the rise of electric vehicles, and shifts in consumer spending have all contributed.
The U.S. and global economies are also much less oil intensive than they used to be. Improvements in energy efficiency and a shift toward more diversified energy sources have reduced the reliance on oil. In 1973, it took more than a barrel of oil to fuel $1,000 of GDP; today it requires less than a third. The commodity still matters, but it no longer holds the same power to slow the economy that it once did.
Just as the economy has become less dependent on oil, so too has the stock market. In 1981, the energy sector made up more than one-third of the S&P 500’s market capitalization. Today, it accounts for less than 4%. That shift reflects a fundamental change in what drives growth and value creation. Energy still matters, but it no longer holds the same weight in determining overall market performance.
Keeping Our Focus
We will continue to monitor the events in the Middle East and the potential impact on portfolios. We recognize that investors have had several developments to grapple with in the first six months of 2025. For many, the headlines have made it difficult to stay focused on what matters for long-term investment success. We remain encouraged by a resilient economic backdrop, solid corporate earnings environment, and a broad investment opportunity set. While the headlines may jolt the markets, these fundamentals are what drive our decisions.
We greatly appreciate your trust. If you have any questions or want to discuss anything in greater detail, please feel free to reach out.