How war could shape markets – Potential scenarios and what they could mean for portfolios
With the International Energy Agency’s 32 member countries agreeing to release 400 million barrels of oil, the largest ever since its creation in the 1970s, to lower crude prices from the war with Iran, it might inspire some investors to believe the threat to markets has been assuaged. But at the same time, Iran has attacked approximately 20 commercial vessels in or near the Strait of Hormuz so far.
The Strait is now part of the Middle East war’s frontline as Iran seeks to inflict maximum economic pain on the world in response to U.S.-Israeli strikes on its territory.
And it’s worth remembering Iran’s newly installed hardline leader lost his father, wife and son to a U.S. bombing that occurred while Iran was negotiating with the US. Any sense of trust has been vaporised with the buildings that have been destroyed. This suggests to me that even if a ceasefire is agreed or Trump declares victory, the seeds of hatred and years of terrorist attacks have only been replanted.
It made me think about the possible scenarios and their consequences for investors. Developing an early framework to examine new developments could assist with investment decision-making.
Possible scenario 1: The surgical end (short war)
Timeline: Ceasefire or regime collapse within 2–4 weeks.
Mechanism: Continued U.S.-Israeli air superiority leads to a total collapse of the IRGC’s command structure, or a pragmatist faction within Iran pushes for an immediate ceasefire to save the state.
2nd order consequences:
- WTI, trading at US$91.89 at the time of writing (11 March 2026), would return to $65–$70, where it has been trading for the past year, as the conflict premium evaporates and the Strait of Hormuz returns to normal function.
- A rapid end to the energy shock would allow the Federal Reserve to consider resuming its planned rate cuts, which had become unviable when the war began.
3rd order consequences:
- European and Asian equities (specifically DAX and Nikkei), which are hyper-sensitive to energy costs, might outperform the S&P 500 in a relief rally.
- A peace dividend for global logistics and insurance firms as maritime risk premiums for the Persian Gulf vanish.
Possible scenario 2: The ‘Modified’ short war
Mechanism: The U.S. achieves ‘Regime Implosion’ rather than ‘Regime Change.’ As prominent Iranian-Swedish-American political analyst, author, and expert on Middle Eastern geopolitics, Trita Parsi, notes, Trump prefers a scenario where he can “wash his hands” of the aftermath.
Parsi argues that while aerial strikes can’t build democracy, they can cause the state to collapse. Trump declares victory the moment the central Islamic Revolutionary Guard Corps (IRGC) command fails, regardless of the chaos that follows.
Trump’s Fear: Parsi argues Trump’s primary fear is the “Iraq Trap” – being responsible for nation-building. By declaring the mission ‘complete’ early, he avoids the political cost of a long occupation.
2nd order consequence:
- A temporary “Trump Bump” for U.S. domestic equities.
3rd order consequences:
- Permanent instability resulting in a discount at least on any firm with Persian Gulf exposure, as a collapsed state leads to years of piracy and regional lawlessness.
Possible scenario 3: War of Attrition (long war)
Timeline: 3–9 months.
Mechanism: The Mojtaba-led regime successfully triggers the ‘Rally Around the Flag’. Instead of the population rising against Mojtaba Khamenei, the foreign strikes unify the public against the external aggressor. Iran retreats into a ‘hedgehog’ defence, utilising asymmetric warfare and strikes against U.S. proxies across the region to drive up global economic costs.
Additionally, arming ethnic minorities (like the Kurds or Balochs – the latter representing one of the most significant internal ‘sores’ for the Iranian regime) or continued bombing will make even regime critics support the military for national survival.
It’s also worth remembering, however, that Trump is hyper-aware that high fuel prices could alienate his MAGA base (videos of former Trump supporters tearing off MAGA bumper stickers at ‘gas’ stations are going viral). If the war doesn’t end quickly, Trump’s “fear of failure” shifts from military to political.
2nd order consequences:
- Stagflation fears gain traction as oil prices persistently toy with US$100/barrel, acting as a global energy tax that depresses consumer spending and keeps headline inflation high.
- Interest rates remain higher for longer as the Federal Reserve is forced to defer rate cuts to combat energy-led inflation at the same time that Gross Domestic Product (GDP) slows or stalls.
- Concerns about record U.S. debt spur de-dollarisation trades, causing bond yields and gold to rise concurrently while stocks broadly remain under pressure.
3rd order consequences:
- Accelerated deglobalisation as nations accelerate the shift toward regionalisation. Investors see a structural rerating of U.S.-based energy aerospace and defence (A&D) firms as domestic security becomes one of the primary investment themes.
- Maybe a flight to ‘fortress balance sheets’ – large-cap tech, for example, with massive cash reserves that can weather a prolonged global slowdown.
- Alternatively, if the conflict widens to disrupt regional shipping indefinitely, the supply chain for specialised gases used in semiconductor chip manufacturing (often sourced in the region) could trigger a tech sector recession.
Possible scenario 4: The face-saving de-escalation (The Trump Pivot)
Timeline: 1-2 weeks
Mechanism: As both sides reach a point of ‘Mutual Pain, they return to the ‘Deal on the Table’ mediated by Oman, which was reportedly already 90 per cent complete before Trump’s strikes.
Iran realises it cannot survive another month of bombardment, while Trump realises his presidency cannot survive another month of oil prices above US$100/bbl.
Trump’s fear, of course; being seen as ‘backing down’ or ‘losing’.
To solve this, one imagines he could frame a return to the pre-existing nuclear constraints as a Total Surrender by Iran, even if the terms are similar to the ones he previously rejected.
Remember, Trump operates on the understanding that a short lie is more easily remembered by his base than a complicated truth.
2nd order consequences:
- A violent reversion for oil and defence stock prices as they lose their war premiums overnight.
3rd order consequences:
- Potentially a major rally in Emerging Markets (EM) and Consumer Discretionary as the global inflationary “chokepoint” is removed.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
