In recent weeks, global markets have been rattled as the United States officially joined a widening conflict in the Middle East. While geopolitical volatility is not new to investors, this escalation presents fresh challenges and significant implications for equity markets.
As the dust settles on this major geopolitical shift, the fundamental question facing investors is: How should one navigate equities in the face of escalating conflict? At Lares, we believe a disciplined, adaptive approach—grounded in historical precedent and real-time risk analysis—is essential to safeguarding and growing your wealth.
In this article, we break down how equity markets typically react to conflicts, what sectors may outperform, what risks to monitor, and what strategies investors can use to position their portfolios wisely.
Understanding Historical Market Reactions to War
Historically, the onset of geopolitical conflicts, especially involving the U.S., often causes immediate market shocks—sharp sell-offs followed by varying periods of recovery. However, the nature, duration, and perceived threat level of each conflict matter enormously.
Consider these examples
Gulf War (1990-91)
Equity markets dropped sharply during the lead-up but rebounded after the war began and expectations clarified.
Iraq War (2003)
Initial uncertainty created a sell-off, but U.S. equity markets began recovering even before major combat operations commenced.
Russia-Ukraine War (2022)
Triggered a global correction, particularly in energy and European stocks, but U.S. markets stabilized faster than expected.
Key takeaway
Markets dislike uncertainty more than bad news. When a conflict escalates, equity prices may fall in anticipation of disruption, but often begin to recover as the situation stabilizes—even if the conflict continues.
Immediate Market Impacts: Volatility Is Back
The U.S. involvement in the Middle East has reignited market volatility:
Major indexes (S&P 500, Nasdaq) have posted sharp intraday swings.
Volatility Index (VIX) has jumped, signaling heightened investor anxiety.
Energy and defense stocks have surged, while broader indices remain under pressure.
Emerging markets with proximity or dependency on the region are experiencing capital flight.
Investors should be prepared for continued headline-driven market movements, where military updates, political statements, and retaliatory actions cause sudden spikes or drops in sentiment.
Which Equity Sectors Tend to Perform Well During Conflict?
Certain sectors have historically outperformed during geopolitical crises. Here’s a look at sectors that may benefit:
Energy
Middle East conflict usually threatens oil supply chains.
Oil prices tend to rise, boosting upstream producers, refiners, and energy ETFs.
Look at companies like ExxonMobil (XOM), Chevron (CVX), or diversified energy ETFs like XLE.
Defense and Aerospace
Increased military spending leads to higher defense contractor revenues.
Companies such as Lockheed Martin (LMT), Raytheon Technologies (RTX), and Northrop Grumman (NOC) historically perform well in wartime.
Defense ETFs like ITA or PPA may provide diversified exposure.
Commodities & Precious Metals
Gold is a traditional safe haven.
Equities linked to gold mining (e.g., Newmont Corp) or commodity ETFs can offer protection.
Utilities and Consumer Staples
These defensive sectors often hold up well during uncertainty.
Low volatility, predictable cash flows, and stable demand make them attractive.
Sectors That May Struggle
Conversely, several sectors may underperform due to the conflict:
Airlines & Travel
Higher oil prices and increased security concerns can dampen demand.
Technology
Highly valued growth stocks are sensitive to risk-off sentiment and rising rates.
Consumer Discretionary
Weaker consumer confidence during geopolitical tension often leads to lower spending.
Investors should assess sector exposure carefully and consider trimming positions in areas most vulnerable to geopolitical headwinds.
Key Risks to Monitor Going Forward
While equity markets can adapt to conflict, the following tail risks could severely disrupt global markets:
Oil price spike above $100/barrel
Could lead to inflation resurgence, pressuring central banks to maintain or increase interest rates.
Wider regional escalation (e.g., Iran-Israel-Saudi involvement)
Risk of disrupting global trade, especially energy shipping routes like the Strait of Hormuz.
Terrorist retaliation or domestic unrest
Could damage consumer and investor confidence in the U.S. and Europe.
China’s role or stance
If China takes sides or exploits the situation economically or militarily, market uncertainty would deepen.
A multi-dimensional risk lens is vital. At Lares, we constantly monitor cross-market signals, geopolitical intelligence, and macroeconomic indicators to update our tactical outlooks.
What Should Investors Do Now?
This is not a time for panic—but it is a time for strategy and prudence. Here are actionable steps investors should consider:
Stay Diversified, Stay Invested
Pulling out of equities entirely often locks in losses and can leave investors behind when markets rebound. Diversification across sectors and geographies cushions against localized shocks.
Tilt Toward Quality and Cash Flow
Companies with strong balance sheets, pricing power, and consistent cash flows are best equipped to navigate uncertainty.
Use Tactical Hedging
For sophisticated investors, hedging tools like options, inverse ETFs, or volatility-linked instruments (like VXX) can reduce downside exposure.
Consider Strategic Overweights
Add selective exposure to sectors benefiting from conflict: energy, defense, gold. This doesn’t mean abandoning core allocations, but rather adjusting the sails.
Reassess International Exposure
Review emerging markets and European holdings. Countries economically or geographically exposed to the Middle East may see increased volatility.
Focus on Fed and Inflation Signals
While geopolitical shocks often cause central banks to pause tightening, sustained oil inflation could reignite hawkish rhetoric. Equity investors should stay alert to policy shifts.
The Long-Term View: Don’t Underestimate Market Resilience
Over the long run, equity markets have consistently recovered from geopolitical shocks. Whether it’s wars, pandemics, or recessions, markets adapt.
After Pearl Harbor (1941): U.S. markets rebounded within a year.
After 9/11 (2001): S&P 500 regained its pre-attack level in less than two months.
After the Ukraine invasion (2022): S&P 500 was up significantly one year later.
Short-term turbulence is real, but long-term opportunity remains for those who stay disciplined.
Final Thoughts: Navigating Uncertainty with Purpose
At Lares, we believe wealth management is about clarity in complexity. While headlines will dominate attention and emotions will run high, we focus on data, discipline, and deeply informed decision-making.
Geopolitical risk is a reminder that markets are not just numbers—they are reflections of real-world uncertainty, shaped by human behavior, fear, and resolve. The current conflict in the Middle East—and the U.S. role within it—marks a pivotal chapter, but not the end of the story for equities.
By focusing on strategic positioning, risk-aware allocation, and historical insight, investors can navigate this volatile period—and even find opportunity amid the storm.
We’re here to help. Reach out to your Lares advisor to discuss how we’re positioning portfolios in real-time and how we can align your strategy to your personal goals—regardless of the headlines.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
