Will international equities be derailed by Iran?

We are nearly two months into the war. As of this writing, the United States has secured a full blockade of the Strait of Hormuz, a two-week cease-fire is in effect and the first round of peace talks has taken place (with signs of some improvements).

In 2025, international equities outperformed the US after many years of relative underperformance. The current year began with considerable optimism among international investors that this was not a fluke but, potentially, the beginning of a longer-term rebalancing. The war in Iran caused some to wonder whether the thesis underlying strong international performance is intact. I think it is, though that will partly depend on how long the Iran war continues.

The duration of this conflict remains the most important factor impacting global growth. Currently, global economies are dealing with a supply shock. Twenty percent of the world’s flow of oil remains stalled, and as of this week the last ships to leave the Strait of Hormuz are now arriving at their destinations.

Supply shocks can be overcome, and global economies and equity markets can recover. We recently saw an example of how quickly global equity investors can respond to the possibility of a solution to this conflict. When the cease fire was announced, European markets rallied around 4.5% while Japan and other Asian markets were up over 5%.

If the war drags on too long, though, and global oil markets remain frozen, a supply shock can turn into a demand shock.  A demand shock can trigger global stagflation, something that we all want to avoid. Fortunately, this may serve as part of the basis for a negotiated end to this conflict. My hunch, then, is that the war in Iran will end before a demand shock and stagflation set in.

What might change

Several themes are already emerging:

• The global demand for oil will increase even after the fighting stops. Prior to the war in Iran, global oil demand averaged about 100 million barrels per day (mbd) with global supply averaging 102 mbd. Going forward, we see this supply and demand imbalance diminishing as countries look to build up their strategic oil reserves above their historical averages to prevent future shortages.
• The European Union continues to be “nudged” closer together. Between the Trump administration’s anti-NATO rhetoric and Europe’s dependence on foreign oil and natural gas, the EU is coming together to better deal with some of its systemic problems. Brexit, Covid, the Russian invasion of Ukraine, and the war in Iran have pushed Europe to address its energy policies, its lack of public and private investments, and its burdensome regulatory environment. The recent election in Hungary was a stirring example of the potential for a tighter-knit EU, as frequent Brussels antagonist Viktor Orban was voted out of power.
• Finally, earnings — and especially forward guidance — will be important. As we enter earnings season, actual results may matter less than how business leaders view the future. Will forward earnings estimates be materially impacted by the war, or can managers already begin to see through today’s uncertainty? We will be watching closely.

Historically, geopolitical events have had only a short-term impact on equity markets. Even the Iran war, with its intimate connection to vital resources and the flow of commerce, is unlikely to be an exception to this rule. Ultimately, fundamentals return to the forefront and companies with a sustainable, profitable business should prevail.

International stocks have multiple levers to pull in order to generate attractive total return potential. Dividend yields are appealing, earnings are competitive to US earnings and valuations remain below historical averages. The dollar as well could resume its decline once the war is over. Assuming that a demand shock and an ugly bout of stagflation can be avoided, my view is that the bullish thesis for international equity remains intact.