From Hormuz to Wall Street: How Geopolitics Is Driving Market Swings

Markets have been highly volatile recently, with sharp swings driven by uncertainty around geopolitical developments. The ongoing conflict in the Middle East continues to weigh on investor sentiment, particularly through its impact on energy prices, global trade routes, and overall economic stability. As long as tensions persist and the outlook remains unclear, markets are likely to experience continued volatility in the near term.

The global chokepoint is the Strait of Hormuz. Even if the war is over in a few weeks, it will take time to normalize flows and production of energy products and derivatives.  Roughly 20% of the world’s oil passes through the strait, along with massive volumes of liquified natural gas (LNG) and fertilizer.  Aside from some pipeline alternatives, there is no substitute for the Strait of Hormuz. That’s what makes it different from the Panama Canal or the Strait of Malacca. Those have workarounds—expensive ones, but they exist. Hormuz doesn’t.

In the long term, the economic effect may be temporary, assuming that oil prices return to prior levels.  However, longer-duration energy cost increases tend to be associated with higher inflation, lower profits, decreased consumer spending, and economic downturns.  Shorter spikes can be taken in stride; longer periods of oil price rises can trigger a recession.

Given that uncertainty, the Federal Reserve voted to hold interest rates steady, while appearing increasingly uncertain about timing for any cuts this year. While the Fed is still indicating there will be one rate cut in 2026 and another in 2027, Chair Jerome Powell noted that higher energy prices due to the war in Iran are likely to increase inflation—though it remains “too soon” to know the conflict’s full economic fallout.  Powell added that inflationary pressure could ease as the impact of President Donald Trump’s tariffs on consumer prices fades. But he cautioned that if inflation remains unchanged, “then you won’t see a rate cut.”

While the S&P 500 fell 4.6% in the first quarter, 6 of the 11 sectors had positive returns led by energy.  Directionally, the sector performance mirrored the experience in 2007 and 2008.

Perhaps surprisingly, consensus earnings estimates for the S&P 500 continue to increase for both 2026 and 2027.  Additionally, corporate balance sheets remain strong with record levels of cash.

Our focus remains on your individual goals and finding the best investments to meet those over the long term.

-The LVM Team