The escalating conflict in the Middle East has investors worried for one big reason: rising oil prices.
Stocks finished this past week lower across the board. The Dow Jones Industrial Average DJIA dropped 3% - the index's worst week since April 4, 2025, when markets sold off in response to President Donald Trump's sweeping "liberation day" tariffs. Meanwhile, the S&P 500 SPX fell 2% over the course of the week, and the Nasdaq Composite COMP lost 1.2%.
At the same time, oil prices shot sharply higher. U.S. benchmark West Texas Intermediate crude oil was up nearly 36% for the week, while global benchmark Brent crude was 27% higher. It was the largest weekly gain on record for both benchmarks, according to Dow Jones Market Data. On Sunday, crude prices shot above $100 a barrel.
"The No. 1 thing that we're watching right now is the price of oil," Zachary Hill, head of portfolio management at Horizon Investments, told MarketWatch.
Hill said that scary geopolitical headlines may cause short-term market swings, but they don't have a lasting impact unless they affect the real economy in some way. War may be shrugged off - but if that war restricts oil's global supply chain and causes prices to spike, investors tend to pay close attention.
There are a few ways that high oil prices affect the real economy. Most directly, the price of crude oil affects the gas prices that consumers pay at the pump. The U.S. economy relies on the spending power of its consumers; if, all of a sudden, consumers have to pay more every week to fill up their gas tanks, it'll likely affect how they feel about their finances and may cause them to cut back spending in other areas. This is especially true given that U.S. consumers already don't feel great after years of above-normal inflation that chipped away at their purchasing power.
Higher oil prices also squeeze businesses, forcing them to pay more for energy. Companies in the manufacturing and industrials sectors are affected by this, but it also influences the many tech companies that are building out energy-intensive artificial-intelligence data centers. When business expenses go up, it cuts into corporate earnings, which investors pay close attention to.
Lastly, higher oil prices cause inflation to go up, which affects monetary policy from the Federal Reserve. The Fed has been in an interest-rate-cutting cycle since late 2024, but inflation has stubbornly persisted above the central bank's 2% annual target. An energy-related price shock could cause the next inflation report to read higher, which could make the Fed hesitant to cut rates at upcoming meetings. Stock-market investors want lower rates in order to justify higher stock valuations.
Investors spent this past week trying to price these things into the stock market, and Hill said that daily price swings showed that it hasn't been easy to do. The Cboe Volatility Index VIX traded above 28 on Friday, indicating that traders anticipate volatility to persist in the near term.
"The intraday volatility we've seen this week is just a reflection of how difficult it is for investors to price geopolitical risk in real time," Hill said.
The sooner the Iran conflict ends, the better for investors
To better position their portfolios, investors are looking at previous crises that caused oil prices to jump. Hill said the best comparison was 2022, when Russia invaded Ukraine and the E.U., the U.S. and their allies placed sanctions on Russian crude oil. Oil prices rose, energy stocks jumped and European stocks underperformed their U.S. counterparts.
However, 2022 was a time when the market was battling with a dramatic jump in inflation and central banks globally were hiking rates. Stocks slipped into a bear market as investors braced for some sort of recession.
The macroeconomic backdrop has changed since then, and investors are dealing with a very different market - but this cuts both ways. According to Gene Goldman, chief investment officer at Cetera Investment Management, higher valuation multiples have led to elevated stock-market volatility, since investors have already priced stocks to perfection. Any new risk could cause equities to swing wildly.
Goldman said that past oil crises have tended to be short-lived, but investors are worried that things may drag on. Trump on Friday said there will be no deal with Iran without "unconditional surrender," and investors are worried Iran may escalate instead of give in. This could drag out the conflict - and the longer it goes on, the more damage will likely be done to markets.
"A short-term dislocation in oil is OK - markets historically bounce back," Goldman said. "But if it extended longer, then you have more supply constraints, higher oil prices and it's harder to get back to fundamentals."
"Every day this goes on, it becomes more likely that the energy shock could prove a little sticky," Ross Mayfield, an investment strategist at Baird Private Wealth Management, told MarketWatch.
If the conflict in the Middle East were to end in the coming days, oil prices would come down - but Mayfield imagined a scenario where prices would settle above their previous lows as traders price in a new risk premium to the asset, just in case conflict breaks out again.
"In this unknown environment, with the U.S. trying to rewrite the way geopolitics and trade works, you're in a place where yields are structurally higher, oil is structurally higher and hard assets like gold (GC00) are structurally higher," Mayfield said. "I think this is all, in a roundabout way, different asset classes trying to price in a more multipolar and tension-laden world."
On Friday, the Dow Jones Industrial Average fell roughly 1%, the S&P 500 fell 1.3% and the Nasdaq Composite fell 1.6%. This coming week, investors will be paying close attention to further developments in the Middle East. They will also get more inflation data, with February's consumer-price index due out on Wednesday and January's delayed personal-consumption expenditures index out on Friday.
