The Iran war dominated headlines in March for good reason. The conflict has already had widespread impacts on oil prices and energy supplies around the world, with the potential for greater disruptions should the war persist.

Stock and bond markets soured globally at the end of the first quarter in anticipation of an oil price shock for businesses and economies. Energy and commodities stocks, however, typically benefit from higher oil prices and rose precipitously at the war’s onset.

We delve further into its effects on asset prices, bond yields, and the economy in this quarter’s Morningstar Markets Observer. Below are some notable observations from the report related to the Iran war.

The Iran war reverses prior gains

YTD Returns of Morningstar Country Indexes

Global stock markets swung from gains to sharp losses after the outbreak of the Iran war. Returns were broadly positive through late February, led by strong gains in South Korea, Thailand, and Egypt, alongside solid performance across Latin America and parts of Europe. Stocks fell across regions after the escalation began on Feb. 28, reflecting global sensitivity to energy and trade shocks.

While commodities rose, emerging-market stocks suffered in March as investors sold risky assets. Emerging economies are generally more sensitive to oil and commodity prices than developed countries, resulting in the steeper decline observed below. The Morningstar Emerging Markets Index fell by 12.6% in March alone. However, it was still one of the best-performing asset classes of the past 12 months, gaining nearly 27% despite the recent selloff.

Developed European and Asian countries are particularly sensitive to this conflict and walked back some of their robust 2025 gains in March. Saudi Arabia and Iraq are important energy sources for Europe, and Japan heavily relies on Middle East oil—much of which travels through the Strait of Hormuz. These developed economies could continue suffering should this critical waterway be offline for an extended period. Traders digested these facts in March, leading to a 9.9% one-month decline for the Morningstar Developed Markets ex-US Index—better than emerging markets, but a steeper drawdown than US stocks. That index consisted of about three-fourths European developed and Japanese stocks at the end of March.

The US benefits from being a major oil producer and from being geographically detached from possible supply constraints, such as closing the Strait of Hormuz. While higher oil and gas prices are likely to have a negative impact on business activity and put upward pressure on inflation, the US economy and its stock market are positioned relatively well to handle a temporary conflict in the Middle East. Along those lines, the Morningstar US Market Index was down only 5% in March. Despite its modest drawdown relative to global peers, it trailed both developed markets and emerging markets over the last year.

Monetary policy to be more restrictive to combat oil price shock

Across the board, markets believe higher rates will be needed to combat inflationary pressure stemming from the oil price shock. As of December 2025, futures markets had been pricing in about 0.5 percentage points in federal-funds rate cuts in 2026, but now they’re pricing in zero cuts. For the Bank of England and European Central Bank, markets are even pricing in rate hikes in 2026.

What the Iran war means for fixed interest

Looking ahead, Morningstar Investment Management sees three possible scenarios unfolding. A brief spike that quickly reverses (scenario 1) is manageable for most portfolios. A longer but partially contained disruption (scenario 2) starts to separate winners from losers, while a sustained shock that keeps oil elevated (scenario 3) is something else entirely—duration becomes a liability, credit spreads widen, and emerging-market sovereign debt faces double-digit losses.

No matter which scenario manifests, long-term investors are wise to tune out the noise and use market volatility as an opportunity to take inventory of their portfolios and rebalance as necessary. Few short-term events have proved detrimental to the stock market over the long term, even if immediate effects are grim. So far, markets have been resilient. Let’s see what the second quarter brings.

Preston Caldwell, Hong Cheng, Sbidag Demerjian, and Sean Murphy contributed to this article.