Why stocks have not crashed

A recent Bloomberg story bewailed the ‘complacency’ of commentary suggesting that stock markets have been resilient to the Iran war. It argues that ‘stocks are crashing globally’ (emphasis in original), pointing out that South Korea is off -9.7%, Japan is off -7.9% and France -7.6%.

It’s a good read but unless you have a very short time horizon, calling it a crash is a stretch. Since the end of 2025 Korea is up a startling 31% despite its recent fall, Japan a respectable 4.3% while France is down just 2.4%. The FTSE All-World index is down 4.4% since the start of the war but almost flat for the year. OK, 4.4% is a lot for a few days but, so far at least, it’s a much smaller shock than last April 2^nd tariff Liberation Day (11% in 2 days) or the bloodbath in 2022 (25% over 9 months).

So, why the modest reaction? The most widely cited reason is that the war – and high oil prices – are not expected to last very long. President Trump has the midterms to fight in a few months time and he will want oil prices back down well before that – so the story goes. Hence most people expect the bombing to last no more than a few more weeks and any US ground troop involvement to be limited – perhaps a landing on Kharg Island, or a snatch operation on the nuclear material.

There may be another reason – underlying stock market bullishness and liquidity. Ahead of the war we were watching in wonder as stock markets outside the US surged. Most non-US stock markets were up 20% or more in 2025 and continued to rise early this year. The economic story was good, as we documented: Recovering economies, lower interest rates and improving profits, together with investors looking to diversify out of the US.

If the war is over soon, many investors hope we can return to that happy story. In a best case scenario, regime change in Iran transforms the politics and outlook for the Middle East. Currently that seems a faint hope but an Iran that quietly goes back to its shell after the war, pumping oil as fast as possible to pay for rebuilding seems like a plausible scenario.

But there are risks:

1.       Even if the US is ready to call a halt, Iran might not comply. Any crimp or threat of a crimp on the Strait of Hormuz could keep oil prices elevated. So far, other powers seem reluctant to help the US navy keep the Strait open but that might have to change.

2.       Damage to oil and gas fields and production facilities could have the same effect, at least for many months.

3.       The short-term hit to real incomes from higher oil and natural gas prices in Europe and Asia could tip weak recoveries (the euro zone, UK, China, Japan) back towards stagnation. If high oil prices persist, hiring and investment plans could be put on hold.

4.       Central banks could over-react to higher inflation by tightening monetary policy. Having under-reacted to the inflation spike in 2021-2 central banks now seem poised to bear down heavily on signs of inflation. Watch this week’s central bank meetings for signs of that. Australia has already led the way with a rate hike though, in fairness, it seems that they had cut rates too much last year.

5.       President Trump’s war has made him less popular in the US, with Polymarket betting now giving the Democrats about a 50% chance of taking the Senate in November as well as the House (85% chance). Political and legal manoeuvring could get ugly in coming months if Trump seeks to avoid that. On the plus side (for markets), further fiscal largesse could also be forthcoming, as well as cuts in rates from new Fed Chairman Warsh.

Our central scenario is in line with the consensus: The war will end within a few weeks and oil prices will fall quickly to perhaps $80 or so, on the way back down to $60 or lower. Iran’s threat to Israel and the wider Middle East will be reduced, at least for a while and Trump can redeploy the fleet to Cuba which seems like an easier nut to crack!

But keep in mind that the dip in stock markets so far is not significant on a long-term time scale and hardly makes a dent in high valuations in the US while leaving other markets fair to fully-valued, not cheap.  If any of the risks listed above come to pass there could be a bigger opportunity. Or not. For most investors, staying fully invested and diversified for the long-term is usually the best strategy.