What We Know

Oil prices have been trending higher due to the escalating war between Israel and Iran, and the potential for U.S. involvement. Equity markets have been shaky given the threat of an Iranian response that could be disruptive to oil supplies, causing an unwelcome spike in prices. Investors have been hesitant to react impetuously to the situation, however, as there remains hope for de-escalation via a diplomatic resolution.

Over the weekend, the course of events turned as the U.S. airstrikes on Iran’s nuclear facilities located in Fordow, Natanz, and Isfahan were orchestrated. It appears the bombings were intended not only to destroy the nuclear capabilities at those sites but to warn Iran that a larger initiative could be undertaken should this not lead to re-opening negotiations to de-nuclearize the country. The message from the Trump Administration is that this was a “one and done” event unless provoked by a forceful Iranian response.

What Might Happen

While the situation remains fluid, Iranian officials have threatened to disrupt traffic through the Strait of Hormuz and warned that Americans positioned in the region could be targeted. The options for additional retaliatory response by Iran include firing at oil tankers or facilities, attacking other Middle Eastern U.S. allies, awakening terrorist sleeper cells in the U.S., or striking back at Israel, to name a few.

Conceivably, Iran could decide to take a measured approach in its response, downplaying the damage to its facilities or nuclear ambitions, and re-engage in negotiations to prevent a broader and more ambitious attack by Israel and/or the U.S., which could topple the regime. This may lead to a more benign outcome or simply buy time to rekindle its nuclear development.

What Should Investors Do

It may be days or weeks before a clear picture of Iran’s response evolves. In the meantime, markets will be jostled by the geopolitical news covering the ongoing action taking place. Today, the percent of personal disposable income spent on energy by American households stands near a record low of 3.4%. It would likely require a sustained rise in oil prices, probably north of $100/barrel, to materially impact consumer spending. So long as the situation in the Middle East remains localized and a path is open for a benign outcome, markets will take their cue from domestic activity. On that front, tariffs remain a risk to slowing the economy, but the One Big Beautiful Bill working its way through Congress, if legislated in July as President Trump hopes, could provide a positive fiscal impulse in the second half of this year and into next.

Investors should stay the course as we expect the stock market to reach new highs this year. Clients can see the details of our views as outlined in the recently released Mid-Year Update.