Iran: Tactical trades for a prolonged conflict

Are markets appropriately pricing in the chances of prolonged conflict in Iran

Market recap

• It’s all oil, all the time, and near-$100 prices for WTI have pushed out expectations of Fed easing, while at the same time are chipping away at growth forecasts.
• Suffice it to say, that’s not a good combination for the equity market.
• The S&P 500 slipped 1.6% on the week, with industrial and financials down most, while the TSX also gave back 1.6%.

Iran

As the Iran conflict drags on, are markets correctly valuing its risks. and has the chance of further escalation been properly priced in? Those are among the most significant questions for investors at the moment. Our view is that markets largely bought into the “TACO” trade, the assumption being that U.S. President Donald Trump would back down after an initial show of force. That wasn’t the case in Venezuela, however, and hasn’t been the case in Iran so far. The death of Supreme Leader Ayatollah Ali Khamenei has seemingly given the U.S. administration an opportunity to de-escalate, but we’re not convinced Trump will take it. Crucially, the Strait of Hormuz—a key trading conduit for a significant percentage of the world’s oil—remains closed, and it is unclear what the U.S. military will be able to do to open it. There is also the potential for Iran to continue its retaliation against U.S. allies in the region, many of which are also key oil producers. Then, there is the Russian angle; President Vladimir Putin is likely quite happy with the conflict, as it has raised the price of oil globally and therefore provided the Russian government with a financial windfall. It is not out of the question that Russia could fund the Iranian government’s resistance in order to prolong the conflict and keep oil prices high. Overall, our evaluation is that the situation is likely to persist for a while longer, and oil prices will remain elevated in the near term. This is not likely to be well received by markets, as the longer oil prices stay high, the greater the risk of inflation and delays to the U.S. Federal Reserve’s anticipated interest rate cuts. We expect a slight drag on economic indicators, though nothing overwhelming just yet. It all depends on how long the conflict will last, and that remains to be seen.

Bottom line: Markets are nervous, and while they’ve held up relatively well so far, that may not last if the conflict in Iran is not resolved quickly.

Oil

Last week, the International Energy Agency (IEA) released 400 million barrels of oil from reserves—the largest such release in history.¹ While this may help to stabilize oil prices in the near term, our view is that broader supply changes are unlikely, because the majority of oil still has to pass through the Strait of Hormuz. It is unlikely that oil-producing gulf states will ramp up production, because even if they did, the real problem is getting that oil to market. We do think other countries could release some of their oil reserves; China, for instance, looks brilliant for having hoarded oil in recent year. But both China and India are net energy importers, and they need to be careful about how and when they tap into their reserves. Our expectation is that oil prices will remain higher for longer. We’d be surprised if it stayed above US$100 per barrel, but that cannot be ruled out. Higher oil prices mean that input costs will go up for many manufactures, and consumers will take a direct hit to the pocketbooks at the gas pump. Ultimately, that will impact consumer sentiment, which could offset some of the tailwinds that markets have been expecting, such as interest rate cuts and the One Big, Beautiful Bill. The Trump administration is also managing a tricky political situation—midterm elections are around the corner in November, and though Trump clearly would not want higher oil prices to persist until that time, he would like to be perceived as the leader behind a strategically important military victory. Depending on the actions required to re-open the Strait of Hormuz, those two objectives may be at odds.

Bottom line: Oil prices are likely to remain elevated for the foreseeable future—though that could reverse quickly if the conflict were to meaningfully de-escalate.

Positioning

While recent market volatility has been challenging to navigate, it has also created opportunities. At our team’s monthly meetings to determine our House View, we start by looking at what, if anything, has changed fundamentally. While the Iran conflict has roiled markets to an extent, the long-term economic fundamentals have not changed significantly. This means that our outlook has remained fairly constant: we continue to see markets going higher from here, and even our regional allocation hasn’t changed much. However, the reason we meet weekly and revisit our monthly House View is to take advantage of shorter-term tactical trades. In this case, we have taken some risk off the table in light of the downside potential in the event the Iran conflict persists, including reducing our allocation to Emerging Markets (EM) since they are likely to be hit the hardest. However, we also evaluated countries within EM that we believe have been harder than they should and remain on solid ground in the longer term. South Korea is one of those opportunities. Another opportunity we explored is in Technology. Earlier in the year, we saw a rotation away from Tech and the U.S. Throughout the Iran conflict, however, we’ve seen the U.S. holding its own while countries more dependent on oil have struggled (remember the U.S. is now an exporter of oil). In particular, Tech now looks like a good hedge against oil prices since it isn’t affected by them as much as other sectors. We have witnessed Tech outperform a typical ‘safe haven’ like Consumer Staples during this stretch.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Pricing in geopolitical risk: Oil, inflation and the cycle’s next phase .

Bottom line: Our South Korea trade highlights that it is our team’s conversations and our ability to build complex trades quickly that enables us to take advantage of opportunities in rapidly-changing market conditions.

—

Originally Posted March 16, 2026 – Iran: Tactical trades for a prolonged conflict

Source

¹Grant Smith, Nayla Razzouk, Jack Wittels, and Ewa Krukowska, “IEA to Release Record 400 Million Barrels From Oil Reserves,” Bloomberg, March 11, 2026.