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The Iran War is having an obvious destabilizing effect on capital markets. What are our expectations at this stage of the conflict?
Any sort of resolution to the conflict, even tactical, would cause a rally in the global markets, but investors shouldn’t necessarily expect a swift return-to-normal even if tenuous negotiations on a peace agreement between the U.S. and Iran prove successful in the coming days or weeks.
The immediate issue, of course, centres on the Strait of Hormuz and the Islamic Revolutionary Guard Corps’ (IRGC) almost total blockade of energy shipments passing through it. This has effectively choked off 20% of global oil and LNG supply and led to markedly higher oil prices, as well as knock-on effects such as a pullback in equity markets and higher bond yields.
It stands to reason, then, that re-opening the Strait should be a surefire catalyst for a reversal of sorts, meaning lower oil prices, rising equities, and falling bond yields. However, we believe the extent to which capital markets reverse course may not be as sizable or lasting as some might be anticipating. For instance, it’s one thing for the Strait to be reopened due to a ceasefire, but a completely different set of circumstances if the U.S. and Israel decide on using military force to break the blockade. The deployment of US personnel on the ground in Iran is unlikely to be well received by U.S. voters or investors.
Furthermore, neither the U.S./Israeli forces nor internal Iranian dissidents have been able to dislodge the Iranian regime or open up the Strait. As a result, unlike the tariff situation, President Trump is not in full control of this conflict. Since they face an existential threat, the Iranian leaders have little incentive to agree to a cease-fire deal that threatens their regime, so the terms of any truce will have to be acceptable to them more so than to Trump.
Trump clearly has a sense of urgency to de-escalate given the impact of the conflict on U.S. consumer affordability, the capital markets, and his approval ratings as midterm elections loom later this year. But even when both sides of the conflict eventually agree to cease fighting and reopen the Strait, that may not be enough for global markets to fully return to normalcy.
The question remains whether there will be enough oil and LNG production to fill the ships that would then be free to pass through the Strait. Given the longer-than-expected duration of the war so far, many producers in the Gulf made the decision to shut-in production because without any means to ship it, their storage capacity filled up. And when that happens, it is not as simple as flicking a switch to turn production back on. By many estimates it will take up to two to three months to restart the approximately 10 million barrels of daily production (nearly 10% of the global total) that was shut down.
Moreover, production may be further hampered by the fact that some energy facilities have been damaged in the fighting already. The most disturbing example is the bombing of Qatar’s Ras Laffan Industrial City, which knocked out 17% of Qatar’s LNG export capacity and could take three to five years to fully repair.
Given that, what are our expectations for oil prices in the near term? It’s obviously difficult to predict, but we wouldn’t be surprised if oil remained well above the US$90 a barrel mark for a period, and believe chances are low that it will fall back to the US$65 a barrel level it traded at before the war.
Indeed, we are if anything more focused on oil futures prices rather than spot prices. The June futures contract for Brent crude is currently trading above US$100, indicating the global markets are no longer anticipating a return to a US$65-$75 price environment any time soon. By extension, we expect capital markets to remain choppy because concerns about high energy prices and rising borrowing costs could linger even after the Strait is reopened. This is especially true if these inflationary conditions end up materially impacting economic growth and corporate earnings.
Indeed, one of the saving graces of global equity markets during the past few weeks has been the fact that historically buoyant earnings estimates have remained relatively unchanged. A deceleration in spending would result in slower revenue growth, while higher input costs from elevated energy prices and higher interest rates may have a negative impact on company profit margins. As a result, earnings estimates may well need to be revised lower in the coming months.
The more prolonged the period of constrained energy supply causing negative revisions to earnings growth rates, the more likely a ceasefire-and-Strait-reopening-induced rally might stall out, preventing the markets from reaching sustainable new highs until earnings expectations and market/sentiment indicators reset.
Ultimately, we believe that a reopening of the Strait and end to the war would clearly be a definitive positive for investors, but we also remain cautious about the degree to which the war’s potential impact on the global economy and capital markets has been priced into current valuations.
How does that caution play into AGF’s investment approach? AGF’s Asset Allocation Committee (AAC) has had an equal weight position in equities, underweight in bonds, and overweight in cash for the last few quarters. Obviously, that stance was not predicated on the Iranian conflict, but it did reflect elevated sentiment and valuations coupled with sticky inflation. More recently, many of our portfolio managers have been raising cash in the last couple of months following the strong start to the year and reducing exposure in extended areas of the market such as high beta equities.
One area that we believe reflects an overreaction is short- to medium-term bonds. In a matter of weeks, the fixed-income market has swung from pricing in multiple rate cuts in the U.S. and the U.K. to pricing in rate hikes for every major central bank.
We appreciate the need for central bankers to sound hawkish about energy-induced inflation in an effort to contain any spillover to higher inflation expectations or prices for other goods and services, but the potential for a deceleration in the economy is rising rapidly. History has shown that hiking rates due to an energy supply shock is often followed in short order by rate cuts as an economic slowdown takes hold. As a result, we expect that most central banks won’t raise rates, and any that do will only hike modestly before needing to consider reversing course.
Canadian and U.S. equity markets have been somewhat more resilient than Asian, emerging, and European markets due to North America’s energy independence. We anticipate that North American equities will remain relatively well positioned as long as energy prices remain elevated. Conversely, some of the most resilient subsectors that have performed extremely well in the past year are at risk of more pronounced corrections, in our view.
Despite our concerns that a post-ceasefire capital market rebound may not initially be sustainable, we do not anticipate a recession. We suspect that the single-digit pullback experienced so far may not be enough to fully capture the potential extent of the impact on economic and earnings growth rates, but we would view a more pronounced correction in the coming months, coupled with more signs of a washout in equities, as an attractive opportunity to add exposure to equities and credit.
In our view, the bond market may already be presenting more intriguing entry points given the substantial recent rise in short- to medium-term yields. Following a conflict resolution coupled with a more durable low in equities, we anticipate that the most energy-sensitive and hardest hit areas of the markets should be good candidates to add exposure, such as consumer, transportation, Asia, and emerging markets.
Overall, despite our near-term concerns and caution, we continue to expect that capital markets will be higher by year end.
David Stonehouse is Interim Chief Investment Officer and Head of North American and Specialty Investments at AGF Investments Inc.
Notes and Disclaimer
Content copyright © 2026 by AGF Ltd. This article first appeared on the AGF website. Used with permission.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of March 30, 2026, and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.
References to specific securities are presented to illustrate the application of our investment philosophy only and do not represent all of the securities purchased, sold or recommended for the portfolio. It should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by AGF Investments.
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AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
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