David Stonehouse, AGF Investments’ interim CIO, does not expect a major correction as the result of this latest geopolitical risk, but warns investors to expect a continuation of choppy markets in the near term.
The United States and Israel’s attack on Iran continues to expand, with both sides striking targets across several countries in the Middle East. What should investors know about the escalating conflict as it continues to evolve?
It’s important first and foremost to understand the geopolitics behind the conflict. It’s no secret that U. S. President Donald Trump had been telegraphing an attack on Iran, both through a buildup of armed forces in the region and through repeated warnings to Iranian leaders that he would act if negotiations to curb Iran’s nuclear weapon ambitions were not taken seriously enough. Moreover, since the initial attack this past weekend, Trump’s stated goals have become even more determined. Not only does he want to prevent Iranian nuclear armament (already heavily impaired following strikes on Iranian nuclear facilities last June), but now he is also committed to a regime change.
To that end, Trump has indicated this campaign could last several weeks and result in thousands of targets being attacked. But regime change is a very challenging goal, particularly given the tenuous political climate Trump faces at home, not to mention abroad. Indeed, the President did not obtain approval from Congress before launching his attack with Israel’s assistance, nor did he inform or seek approval from the UN Security
Council.
Perhaps most importantly, though, is the widespread opposition he faces from many Americans who voted for him—at least in part—because of his campaign promise to avoid U. S. involvement in foreign wars. With six U. S. military personnel already killed and Trump and his military leaders acknowledging the likelihood of more casualties to come, it seems very unlikely that the President will send ground troops into Iran despite his claim to do “whatever it takes. ” If anything, we believe he needs to wrap this campaign up quickly or risk greater losses in this fall’s midterm elections. However, without troops on the ground, the U. S. will have to rely on local protesters to overthrow the brutal Islamic Revolutionary Guard Corps (IRGC) that, along with the clerics, controls Iran.
Do you see any similarities between the U. S. /Israel attack on Iran with the very recent U. S. operation to remove Venezuelan President Nicolás Maduro and seize control of Venezuela’s oil reserves?
While the Iran attack is ostensibly about its nuclear capability, a potentially even bigger goal for the U. S. does appear to be increased control over global oil supplies. If a more U. S. -friendly regime takes over in Iran, the U. S. would conceivably have much more influence on oil supply in the region, which could help them keep a lid on oil prices. Furthermore, much of Iran’s oil is shipped to China, and combined with curtailed Venezuelan shipments to China, this could enable Trump to exert more influence in his upcoming trade meetings with President Xi Jinping. It would also help his efforts to improve affordability for U. S. consumers and potentially bolster Republicans’ chances in the midterms.
Recognizing these geopolitical considerations, what are your expectations for financial markets in the coming days and weeks?
As one might expect, the initial market reaction has included volatile equity prices and bond yields and rising oil and gold prices, but extreme moves have so far been short-lived, for several potential reasons. First, the U. S. /Israel strikes did not come as a total shock (as mentioned, there were numerous signs of an imminent campaign). Second, markets have become conditioned to buying equity dips and fading commodity price bounces following geopolitical events, because investors often think the potential impact on company earnings will be limited. Third, if there is a regime change in Iran that is more pro-West, the U. S. could increase its influence to a significant portion of the world’s oil supply (combining North American production with other influenceable jurisdictions including Venezuela, the North Sea and parts of the Middle East). Having more oil flow out of the Middle East to the West could result in lower oil prices, not higher.
Still, there are some caveats. While oil prices could end up falling after their initial spike, it may be difficult for them to drop all the way back to levels that prevailed earlier this year. Approximately 20% of global oil supply flows through the Strait of Hormuz, and while the Iranian navy has been hit hard, it can still be enough of a threat that tanker traffic may be curtailed, reducing supply in the short term. We note that so far both sides seem to be avoiding targeting energy infrastructure, so the tail risk of a huge or sustained oil price spike seems less probable at this stage. Second, bond yields have reversed direction and started to rise as they price in higher inflation due to increased energy prices. Third, as this campaign is likely to last at least several weeks rather than days, and the future leadership of Iran is in question, the knee-jerk reaction to “buy the dip” in equities may not play out quite as straightforwardly as prior events. This operation could end up being more prolonged and have somewhat of an impact on earnings prospects through higher energy prices and lower consumer activity.
In sum, the markets seem to be adjusting so far as expected, with an initial commodity price spike and equity weakness that are to some extent fading. However, while we do not anticipate a major stock market correction as our base case in the coming weeks, there are enough risks from this action, coupled with other market concerns such as AI and private credit, that a continuation of the choppiness witnessed so far in 2026 would not be a surprise. For the time being, our asset allocation committee continues to maintain an equal weight stance in equities, coupled with an underweight position in bonds and an overweight allocation to cash.