Lessons from Iran

Investors’ traditional war playbook is ‘equities down, bonds up’. So far, the Iran conflict has delivered the opposite. The question is whether investors can draw any lessons.

11 May 2026

Imagine being told on 27 February 2026 that a war in the Middle East which would effectively block the Strait of Hormuz is about to begin, and you are in the privileged position of not only knowing this for certain but being able to pre-position for it. Given this unique opportunity, traditional investment logic would dictate reducing equity exposure within your portfolio and ramping up classic diversifiers, such as government bonds.

Incredibly, this strategy would have lost money from the date the bombings started to the end of April. Surprise that stalwarts like the 10-year US Treasury note actually went down would only have been superseded by complete disbelief that the S&P 500 Index was in outright positive territory by late April, having performed a V-shaped recovery within a matter of weeks.

The urgent questions facing investors in the wake of this surprise are whether markets are somehow ‘wrong’ - and may be about to resume normal service in response to events in the Middle East - or whether fundamental shifts in the market landscape may be challenging the diversification ‘superpower’ traditionally associated with US Treasury bonds, while giving the S&P 500 a new-found resilience.

Role reversal – S&P 500 recovers as bond yields rise (and prices fall):

From 31 Dec 2025 to 4 May 2026

Starting with the response of US Treasuries during the Iran conflict, the 10-year bond yield rose from 3.9%* on the eve of the first airstrikes to 4.4%* by 4 May, with prices conversely coming down. This came as a surprise to investors who saw US Treasuries as a reliable safe haven. But it’s worth pointing out that in fact they don’t automatically go up every time there’s bad news in the market. Recent research¹ by AQR indeed shows that they were often quite correlated to stocks in the 20th century and that it’s only in recent decades that bonds acted inversely to stocks (ie defensively) during periods of elevated volatility.

An inflation shock, not a growth shock (for now)

Whether US Treasuries might be expected to go up or down during volatility periods depends on whether the external shock is more growth or inflation related. As AQR presciently wrote in 2022, “Inflation levels have stabilised in some markets, but inflation uncertainty remains higher than it has been for several decades.” This relatively new inflationary backdrop has arguably made US Treasuries sensitive to expectations of rising prices. It seems little wonder then that they quickly reacted to the supply chain shock of the Iran war through higher yields (and lower prices) to reflect higher future inflation. A non-inflationary ‘pure’ growth shock would likely have looked different and had the desired ‘protective’ effect that has been missing in recent weeks. Yields would likely have adjusted lower and bond prices would have moved conversely higher. Economic growth of course may yet take a hit. The Organisation for Economic Co-operation and Development (OECD)² and International Monetary Fund’s³ (IMF) latest economic growth forecasts in March and April respectively are not significantly downgraded, but they do make provision for the possibility of slowdown. But for now, in the eyes of the bond market Iran remains more of an inflationary shock than anything else.

Lost it – US Treasuries stopped offering their appealing negative correlation to stocks from 2022:

Five-year correlation from 31 Dec 1999 to 4 May 2026

Why do US stocks seem to just keep rising?

With one mystery seemingly solved, it’s time to turn to the bigger one, specifically how US equities have managed to make outright gains since the Iran war began. Specifically, US large cap stocks in the form of the S&P 500 which make up well over 60% of the MSCI World All Country index have risen +4.9%* from 27 February to 4 May. Some commentators have rushed to describe this as complacency, or even as an unfair lack of punishment for a war which America itself helped to start. But there are profound drivers behind this relative resilience worth considering.

AI optimism and corporate earnings lend support

The first is the prospect of continued progress in AI. As of 4 May, Wall Street’s consensus estimate for 2026 earnings growth in the tech-heavy Nasdaq 100 Index is now expected to be over 37%* versus the previous year. While US energy stocks are inevitably expected to cash in from oil supply constraints, the broader S&P 500, which includes plenty of ‘potential victims’ of an energy shock, including consumer and transportation stocks, is still predicted to see earnings growth of over 20%*. Counterintuitively, these estimates for 2026 have in fact risen since the war began.

Wars are bad, but not always for equities

The other supporting factor is historical, namely that wars just haven’t consistently and exclusively induced stockmarket crashes or recessions in the US. Perhaps this reflects America’s privileged geographical position of being able to get involved in overseas ‘adventures’ and then pull out with little consequence to the domestic economy. It is true that World War II contributed to delaying the S&P’s recovery from the 1929 crash until the early 1950s. But Vietnam, Gulf War I, Afghanistan and Gulf War II could not be said to have profoundly damaged either the stockmarket or economy in themselves. The innovation impulse and the natural economic growth accruing from America’s huge internal market have proven tough to thwart over time.

Retail investors buying the dip? There’s an app for that

But perhaps the biggest factor supporting the market right now is America’s army of retail investors. Research by JPMorgan Chase⁴ has revealed a seismic structural shift in this part of the market. For example, the share of 25-year-olds that used investment accounts was 6% in 2015 but as of 2024 had risen to 37%. This in turn has introduced a ‘buy-the-dip’ mentality in which many investors now see bad news as an opportunity to buy ‘on the cheap’ rather than to sell, or just stay put. As the Wall Street Journal succinctly put it recently, “Bad news stirs even greater interest among investors who see only prospects for the stock market to keep setting records.”

Consumers could soon feel the squeeze

For investors, the takeaways from all this are varied. First and foremost, the market responses to the Iran war should not be a trigger to completely up-end existing portfolios. US Treasuries are focusing more on inflation for now, and could be a source of portfolio volatility. But if the war persists, continued inflation will also start to affect economic growth as consumers are forced to spend more on energy (which generally can’t be substituted) and less on other items, such as discretionary goods and services (eg buying new cars and eating out). On both sides of the Atlantic, public-interest stories abound of families starting to consider tough trade-offs between transportation and heating versus future holidays and going out. So a carefully constructed and sized government bond exposure could therefore yet be useful.

As for the stockmarket, much depends on how the changes described above are viewed, ie reflective of euphoria or of deeper structural shifts. While there is an element of ebullience to recent earnings upgrades and retail investor behaviour, the change in the landscape of who is investing - facilitated by trading apps and (admittedly) hyperactive internet forums - suggests a long-lasting cultural change which if anything probably supports the traditional buy-and-hold approach that has seen so much success historically.

Staying invested - long-term resilience doesn’t mean short-term invincibility

That said, big increases to US equity allocations and fevered piling into the market on bad news days could tempt fate from here. Yes, the US equity market is proving resilient but as valuations become expensive again bumps along the road risk becoming more frequent. And for some investors, smoothness of trajectory is almost as important as the end point itself. On this basis, re-testing suitability and risk appetite rather than making reactive portfolio changes may be a sensible course of action. Done well, it could ensure that investors can continue to handle surprises, pleasant or otherwise.

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.