Early 2026 saw the stock market carry over its momentum from 2025, with the S&P 500 supported by strong double-digit earnings growth (five consecutive quarters of year-over-year growth) and a resilient U.S. economy (2.1% GDP for 2025). However, the U.S. and Israel’s surprise airstrikes on Iran—and Iran’s subsequent retaliatory strikes against Israel, U.S. military bases, and U.S.-allied countries in the region—have resulted in increased volatility and a declining stock market. As I write, the S&P 500, Dow Jones, and NASDAQ are all in negative territory, year-to-date. Increased concern about the massive amounts of capital being spent on artificial intelligence (AI) and the potential of an AI-related bubble is adding to the pressure surrounding U.S. stocks. Valuations are already at historically high levels, and with increasing tensions in the Middle East, stocks are likely in for a bumpy ride, at least in the near-term.
The war in Iran is also causing significant concern over the state of the global economy. Oil prices have surged as high as $120 per barrel (the highest levels in nearly four years), and shipping through the Strait of Hormuz has been disrupted. Both threaten higher inflation and slowing economic growth. The combination of higher energy costs and reduced economic output could force central banks—including the Federal Reserve (Fed)—to halt further interest rate cuts and perhaps even consider rate hikes. Currently, the Fed has left 2026 rates unchanged after its series of cuts in 2025. A slowing economy, deteriorating labor market, persistent (and possibly increasing) inflation remaining above the Fed’s target, and growing uncertainty about the situation in Iran will leave the Fed with many challenges throughout the remainder of 2026.
The headwinds surfacing for the global economy and broader stock markets are many and ever developing. It is far too early to predict when this conflict in the Middle East will end. However, a quicker resolution is the best-case scenario in which we would expect consequences to be muted and less intense. For now though, we expect economic growth to slow in the first half of 2026 and for stocks prices to remain volatile, with increased downside risk for the near-term.
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