March Madness

There will be multiple twists and turns over days, weeks and months, but a de-escalation in the Middle East conflict is more likely than not.

March is typically the month when many of us follow college basketball and the “March Madness” of watching exciting men’s and women’s games. Not this year. As we enter the fifth week of the Gulf war, all eyes are on energy markets and geopolitical risks.

What seems surprising is that risk markets have held up better than expected since the conflict ignited, causing a fissure in the geopolitical landscape of the Middle East and forcing the effective closure of the most important energy chokepoint in the world.

At the time of writing, the MSCI ACWI index is down about 8% since the conflict began on February 28 and down about 5% year-to-date. The U.S. rates market has also moved about 50 basis points higher, while credit spreads have remained relatively contained during the war.

Global markets appear, therefore, to be rationalizing developments across a wide range of outcomes and arriving at a measured conclusion: de-escalation is the most likely path forward. The Strait of Hormuz is simply too important geopolitically and economically for its effective closure to persist. At the same time, the lower oil intensity of the global economy today has helped drive a more measured market response to the war.

A Local Chokepoint of Global Importance

Despite the lower oil intensity, the commodity is still critical to world economic activity. Approximately 20 million barrels of oil per day (around 20% of global supply) transit through the Strait, with large volumes of helium, liquified natural gas (LNG), refined fuels, petrochemical feedstocks and fertilizers also needing to move through, highlighting the channel's centrality to global industrial supply chains.

The duration of this shock and the extent of the energy shortages remain the key variable. Even if a ceasefire is declared in the near term, it will likely take several months or more before energy supplies return to pre-war levels. As of this writing, while some energy production capabilities have been damaged (particularly LNG), it appears that the vast majority are still intact.

Crucially, the impact is asymmetric: economies more reliant on imported energy—China, Europe, India and Japan—face meaningfully greater disruptions than the U.S., which has achieved a high degree of energy self-sufficiency.

Currently, the forward curve for oil prices has WTI and Brent at $76 and $82, respectively, by December 2026. At these levels, we do not see significant demand destruction nor a meaningful increase in inflation. We estimate that oil would need to be in the $150 range for a six to twelve month period before it would lead to meaningful demand destruction, likely reducing global and U.S. GDP by about a full percentage point and half a percentage point, respectively. In addition, core inflation could increase by 0.25—0.50 percentage points, while headline inflation, which includes energy, could be up in the 2-percentage point range.

Fog of War and Multiple Outcomes

To be clear, we are still very much in the fog of war. Negotiations appear to be ongoing as we write, yet we expect many twists and turns before any durable resolution emerges. We’re likely to see a series of negotiations followed by violations of cease fires followed by more negotiations.

The announced deployment of additional U.S. troops to the Persian Gulf and the administration’s decision to extend its deadline for attacking Iranian energy infrastructure to April 6 reflect this state of flux, further complicating the picture.

Yet our central view is that the economic and strategic costs of a prolonged closure of the Strait of Hormuz are simply too severe, and too widely distributed—the waterway is of strategic importance not just to the U.S but to Europe, China, India and Japan—for the conflict to remain unresolved for an extended period of time. Even Iran, which currently holds leverage over the Strait, depends on oil revenues to sustain its economy.

That said, we do not expect a clean resolution. The U.S. still must deal with the critical issue of the 900 pounds of enriched uranium that Iran possesses (enough to produce 10-12 nuclear weapons). Iran has been able to keep domestic resistance in check, but for how long, given the damage being inflicted. A geopolitical risk premium on oil prices is likely to persist for some time. Rogue actors, residual proxy threats, and unresolved questions around Iran's internal power structures mean that the region may not return quickly to the pre-conflict status quo.

What’s more, we would also note that a scenario in which the current Iranian regime collapses entirely is not necessarily a benign one. A large country of about 90 million people, with deep tribal and sectarian divisions, fracturing chaotically could represent an even worse outcome for regional stability than a chastened regime stripped of its nuclear ambitions.

Focus on the Long Term

Nevertheless, despite many significant uncertainties, we continue to advocate staying the course on long-term strategic asset allocation. Sell-offs driven by the inevitable twists and turns of this episode should be viewed as opportunities to build toward target allocations.

Higher risk premiums are certainly appropriate, and the range of outcomes of this conflict remains wide. Diversification remains essential. But the durability of global and U.S. economic resilience, the breadth of political interests aligned toward de-escalation, suggest we will return to the productivity gains and nominal growth that defined early 2026.This supports remaining engaged rather than stepping back.