How could the conflict between Israel and Iran affect stock markets?

The conflict between Israel and Iran has rekindled geopolitical tensions in the Middle East, and financial markets are already beginning to anticipate the possible consequences. One area of concern is the potential impact on oil prices, which play a key role in inflation and, therefore, in the monetary policy decisions taken by central banks.

“This conflict between Israel and Iran could potentially increase the price of energy and subsequently drag down prices across the board,” said Javier de Berenguer, market analyst and fund selector at MAPFRE Inversión. “If the conflict worsens, it could lead us to a stagflation scenario, which is not good for the markets, especially in an environment of slowing aggregate demand.”

Between 20% and 30% of the world's oil goes through the Strait of Ormuz, an area that is particularly sensitive to any military escalation. The recent drop in crude oil prices was one of the factors that allowed central banks to start rate cuts as inflationary pressures eased. This is why a sustained upturn in energy prices, which could slow or reverse this process, is a particularly concerning prospect.

ECB: caution in the face of uncertainty

“If oil prices remain at these levels, inflation will not necessarily spiral out of control, says Berenguer, although he warns that they represent a floor that makes it more difficult to maintain the price moderation seen in recent times. This could cast doubt on future cuts by the European Central Bank (ECB), as initially anticipated for the remainder of 2025.

“Inflation has been favorable in most regions, supported by falling commodity and energy prices, but now the price of a barrel of oil is back where it was at the start of the year,” he adds. In this context, the ECB's greatest concern would not be inflation or growth, but uncertainty. “It will have to wait for greater clarity before making further rate cuts.”

In the United States, it seems that the Chair of the Federal Reserve, Jerome Powell, is resisting political pressures to carry out higher rate cuts, believes Berenguer. “I don't think he wants to be remembered for making the same mistakes as some of his counterparts in the 70s,” says Berenguer. Inflation and growth forecasts, which will be updated soon, will be transitory and we will have to wait for the outlook to become clearer.

Inflation remains high in the United Kingdom. “The latest figure showed a 0.1% decrease, but we are still talking about a figure of 3.4% year-on-year, so rate cuts are unlikely,” he points out.

Investment strategy: caution, but there are opportunities

Given this volatile environment, a selective investment strategy must be implemented. “We cannot be directional in terms of risk assets, because uncertainty is quite high,” Berenguer warns. In terms of fixed income, the focus should be on short durations and high-quality credit, and in terms of equity, on companies with pricing power and good growth expectations.

As for gold, it has gained weight as a structural element in portfolios driven by geopolitical uncertainty and an increase in global reserves, but MAPFRE Inversión does not see clear appreciation potential, which would depend on further purchases by central banks, Berenguer concluded.