The Three Key Iran War Factors Driving the Macro Outlook and Markets

RoadMap: Monthly market report prepared by the Mapfre AM team

What happened over the past month?

March was marked by geopolitical developments in the Middle East, which triggered a sharp episode of risk aversion. The surge in oil prices and rising inflation concerns led to a rapid repricing of inflation and monetary policy expectations, temporarily overshadowing macroeconomic and corporate fundamentals. As a result, both equities and fixed income corrected simultaneously, with the dollar as the only safe-haven asset, while gold declined by more than 10%.

Market volatility has remained (and continues to be) elevated, as sentiment swings between episodes of heightened risk aversion when tensions escalate and sharp rebounds when signs of progress in peace negotiations emerge. Oil prices briefly exceeded 115 dollars per barrel; however, on average, prices stood at around 100 dollars—representing a 60% increase over the month and one of the largest shocks in recent decades. Iran’s closure of the Strait of Hormuz has prevented approximately 20 million barrels of oil per day and around 20% of global liquefied natural gas from transiting this strategic chokepoint. This continues to strain energy markets and, together with attacks on Gulf infrastructure, could begin to cause supply shortages for both companies and households if the blockade persists. The measures announced to increase supply—including lifting sanctions on Russian gas and oil, the release of strategic reserves by the G-7, and the recent increase in production by OPEC—are only temporary solutions that partially offset the decline in maritime traffic through the strait.

Against this backdrop, global equities declined by 6.55% in local currency. The S&P 500 and the Nasdaq 100 fell by around 5%, while European and Asian markets posted declines of between 8% and 13%. This weaker performance reflects these economies’ greater dependence on energy prices (as net energy importers), as well as profit-taking following a strong 2025 and a solid start to 2026 prior to the outbreak of the conflict on February 28. At the sector level, energy was the only sector to avoid losses, while all others declined in a synchronized manner, reducing the benefits of diversification.

Inflation concerns led to a significant increase in required yields on government bonds. U.S. Treasury yields moved comfortably above 4%, the German 10-year bond exceeded 3%, and Spain’s risk premium rose to 50 basis points. In general, the

sharpest increase occurred in shorter maturities, reflecting the market’s view that the conflict will be short-lived and will not have a significant long-term macroeconomic impact.

In the case of corporate bonds, credit spreads widened for both higher-quality and higher-risk debt, amid ongoing concerns about the state of private (non-listed) debt markets. There were also meetings of the Fed and the ECB, which resulted in no policy changes as policymakers await greater visibility on how the conflict will evolve. However, the market is now pricing in three rate hikes by the ECB this year and no rate cuts by the Fed.

What's our take?

Tensions in the Middle East remain elevated, and the three factors we identify as key to assessing their impact on the global macroeconomic environment and financial markets have deteriorated.

First, the duration of the conflict has now extended beyond seven weeks, effectively ruling out the possibility that this is a temporary episode involving partial disruptions without systemic damage. At this stage, it remains very difficult to predict when the war will end, given the United States’ need to secure a swift resolution that can be presented as a victory—and the challenges this entails under current conditions. Achieving this would likely require a further escalation of tensions in the region to strengthen its negotiating position.

No agreement that does not include the reopening of the Strait of Hormuz can be viewed as positive for U.S. allies in the region. This narrow maritime passage remains closed to most commercial vessels, effectively blocking the flow of 20 million barrels per day. It is true that the pipeline connecting Gulf oil fields to the port of Yanbu in Saudi Arabia, as well as the Fujairah pipeline in the United Arab Emirates, are allowing part of this volume to bypass the Strait of Hormuz, thereby easing some pressure on energy markets, although supply shortages could begin to emerge if the blockade persists.

In previous oil shock episodes, the situation was very different: the global economy was moving away from the gold standard, the United States was not energy independent as it is today, and economies were more dependent on oil than they are now. If we are to draw any meaningful parallels, the only practical approach is to closely monitor three key factors—duration of the conflict, developments in the Strait of Hormuz, and potential structural damage—to adjust portfolios in what will likely remain a fluid environment. Markets will be watching the price of oil especially closely. A sustained price above 100 dollars per barrel would significantly escalate the scale of the conflict’s economic repercussions.

The third factor relates to damage to energy infrastructure. Of the three factors, this is clearly the one that has deteriorated the most. Various reports indicate that between 15% and 20% of production capacity and inventories have been damaged.

As a result, within our scenario framework, we are moving toward a more severe scenario, in which significant damage to Gulf infrastructure would keep oil prices at or above 100 dollars per barrel for an extended period. In this scenario, the risk of higher inflation would also weigh on growth, driven by demand destruction due to higher prices, reduced inventories, and the inability of some sectors to maintain operating margins. Southeast Asia would be the most affected region, followed by Europe (although we remain some distance from that scenario). If the conflict extends into the summer, we would move into the most adverse scenario, with technical recessions in several economies.

Geopolitical tensions, combined with growing concerns about private debt markets, could lead to a tightening of financial conditions, which have so far remained relatively accommodative. Tighter credit conditions would act as a drag on growth, which had been a key driver in the United States, supported by the significant investment committed to building data centers linked to the deployment of artificial intelligence (AI).

In Europe, these tighter financing conditions would arise less from the corporate side and more from public finances. As is well known, some Eurozone countries face a fragile fiscal position and would be confronted with a lower-growth environment without the capacity to implement support programs for households and companies, such as those introduced in 2022 following the war in Ukraine. In this context, the ECB has already called for “prudence” in governments’ fiscal policy actions.

So far, as noted at the beginning of this report, the increase in yields has been more pronounced at the short end of the curve, resulting in a flatter government yield curve. As the conflict has persisted, the market has moved past the peak of inflation fears and is now focusing more on the impact on growth. This may explain why, in early April, long-term bond yields have declined, alongside a downward revision of growth expectations across the main geographic areas.

The widening in corporate spreads remains moderate relative to the scenario the market could face in the coming weeks. Evidence of this is that bonds in the financial sector have not underperformed significantly relative to other corporate sectors, as has been the case in previous crises. On the positive side, the strength of the sector reduces the likelihood of a broader increase in systemic risk. Lower-rated bonds, however, appear to be more affected by the decline in risk appetite. Outflows from European high-yield funds have been significant, further tightening access to credit and financing. In emerging markets, bond price performance is

showing significant divergence between oil-exporting countries (Venezuela, Colombia, Brazil, Argentina…) and oil-importing economies (Southeast Asia), as well as those where food carries a higher weight in inflation (Peru, Uruguay, or El Salvador). The relatively strong performance of some currencies against the dollar is also due to elevated real interest rates prior to the outbreak of the war.

Headlines surrounding the conflict in the Middle East continue to capture market attention, even as corporate dynamics remain in play. The opportunity and risk associated with AI continue to shape business developments, with ongoing announcements of strategic agreements for its implementation, and the first-quarter earnings season is about to begin. In this regard, expected earnings growth has not only held up since the outbreak of the war in Iran but has been revised upward since the beginning of the year. For 2026, double-digit earnings growth is expected for both the S&P 500, the Stoxx 600, and emerging markets.

The decline in equity indexes in March, combined with still-elevated earnings levels, has resulted in a compression of valuation multiples of around 10%. This “imbalance” will need to correct in one way or another: either prices recover to pre-war levels, or earnings will need to be revised downward. With margins at peak levels and very strong growth expectations, the risk of disappointment is higher, supporting a cautious stance.

What are we doing?

The situation remains highly fluid, with a very asymmetric risk profile across both equities and fixed income. Accordingly, over the course of the month, we reduced our equity exposure and increased liquidity, awaiting greater visibility before taking on additional risk again—even if this means foregoing some returns in the short term. In fixed income, we unwound our positioning in steeper yield curve strategies and have continued to add bonds at higher yields whenever possible.

What alternatives exist to the Strait of Hormuz?

The Strait of Hormuz is a bottleneck for the global energy market, but Yemen’s involvement in the conflict also puts the Bab el-Mandeb Strait at risk, which connects the Red Sea with the Gulf of Aden and is a key transit route to the Suez Canal.

Alternatives to these bottlenecks involve extending maritime routes around the Cape of Good Hope in South Africa, as well as increasing the use of pipelines and gas pipelines to transport oil and gas from fields in eastern Saudi Arabia and the United Arab Emirates.

The Yanbu pipeline (Saudi Arabia) is currently capable of transporting around 4.6 million barrels per day, while the Fujairah pipeline (UAE) diverts approximately 3.1 million barrels per day away from the Strait of Hormuz.