Geopolitical conflicts have a way of capturing investors’ attention, particularly when they involve major energy-producing regions. The ongoing tensions involving Iran have raised understandable concerns about oil prices, inflation, interest rates and the broader economy. Yet while geopolitical shocks can create volatility, history suggests they are often better investing opportunities than reasons to sell.
The most important question for investors is whether a conflict remains contained or escalates significantly. An increase in escalation, particularly if it involves troop deployment, tends to be viewed negatively by both the stock and bond market, and lead to higher short-term and longer-term oil prices. At that point, the Fed would have no choice but to act with higher interest rates even though it likely would weigh on economic growth.
That represents a true worst-case scenario: slower growth, higher unemployment and higher rates. Fortunately, that is not our base case, as the presidential administration is likely feeling the pressure to find an off-ramp to the conflict to reduce these risks. Recent market performance suggests investors are anticipating that outcome as well.
It is also important to remember that the global oil market looks very different than it did during past geopolitical crises. Absent this conflict, the world is well supplied, even over-supplied, with oil. The challenge today is more about distribution than supply. Consequently, the impacts to inflation and economic growth are being viewed as temporary.
Meanwhile, for everyday investors, geopolitical risk presents a unique challenge because it is very difficult, nigh impossible, to predict and its impact is very binary. Either events escalate dramatically or they do not. That reality means that using a traditional scenario analysis to try to manage the risk is less useful.
The good news is that history offers some reassurance. Past periods of geopolitical risks have been better investing opportunities than reasons to sell. Rather than trying to predict every headline or military development, investors should focus on something they can control: building a portfolio with an appropriate level of risk. The goal is to have a portfolio that can withstand shocks, like the Iran conflict, and to be able to stay the course, or even better, to be able to view periods like this as opportunities.
The resilience of the U.S. economy and financial markets over the past several years reinforces this point. That resilience—in the face of a surge in inflation, tariff policies and the Iran conflict—shows the breadth and magnitude of the positive underlying fundamentals in play.
As investors look across sectors, the energy sector probably has the most direct exposure to the volatility introduced by the Iran conflict, but the longer-term outlook remains supported because we expect energy to be in demand going forward based on the needs for power in our increasingly AI-driven world.
Beyond energy, opportunities remain broad-based. The broadening of economic activity, reflected in earnings estimate increases not only in large-cap companies but mid and small-cap as well, means sectors like industrials show good prospects. Likewise, solid growth and low credit costs favor financials.
Artificial intelligence also continues to create investment opportunities. While the markets are beginning to discern winners and losers within our AI future, investors should remain diversified because the prize for winning could be very large. In fact, we continue to see an opportunity to be diversified rather than relying on concentrated bets.
There may also be changing dynamics within the investment management industry. We may also be entering a period where active managers, who have struggled against passive-oriented strategies for an extended period, could have a better environment to both manage risk and pursue returns.
Finally, investors should pay close attention to monetary policy. Do not underestimate the impact of the changes at the Fed and the FOMC’s implementation of monetary policies. As policymakers evolve their approach, market participants may find that the next ‘Fed put’ might be much less likely than that to which we have become accustomed.
Geopolitical risks will always be with us. The key takeaway is not to ignore them, but to keep them in perspective. While conflicts can create short-term volatility and uncertainty, investors are generally best served by focusing on diversification, maintaining an appropriate level of risk, and staying committed to long-term fundamentals. As history has repeatedly shown, periods of geopolitical stress often create opportunities for disciplined investors rather than reasons to abandon a well-constructed plan.
Steve Wyett is the chief investment strategist for BOK Financial.