Iran war: What’s driving market sentiment?

Key takeaways

• Many assumed that if the Middle East conflict lasted more than a few weeks, it would be meaningfully negative for risk assets.
• Markets appear to have made a judgment call. They haven’t priced this as a conflict that spirals endlessly outward.
• It seems markets crave narrative closure more than calendar precision; are conditions getting better relative to deteriorated expectations?

“It depends on the duration of the conflict.” I cannot remember ever hearing a singular phrase as often as I have this one during the ongoing conflict in Iran. I know that I’ve said it more than once. It has become a kind of shorthand explanation for the uncertainty that conflict brings to economies and markets. If we only knew how long this would last, then we could understand the impact on growth, inflation, policy, and markets.

At the outset, many assumed that anything lasting more than a few weeks would be meaningfully negative for risk assets. Now we’re approaching six weeks. And yet the S&P 500 Index is now nearly flat since the conflict began.¹ Credit spreads have tightened.² Volatility spiked early and then receded.³ Markets did what markets often do — they appear to have absorbed the shock.⁴

That reality forces a reconsideration of the original assumption.

Narratives versus specifics

Perhaps it wasn’t the specific duration that mattered most. Perhaps it was whether the market would ever succumb to a belief that there was no end in sight. Investors, particularly after last year’s Liberation Day whipsaw, have shown little appetite for pricing in open-ended worst-case scenarios.⁵ The cost of being overly defensive too early may remain fresh in investors’ memories.

In that context, markets appear to have made a judgment call. They appear to not have priced this as a conflict that spirals endlessly outward. Even talk of a ceasefire, like we got last week, sustainable or not, had been enough to lift risk sentiment. The bar for relief has been surprisingly low.

The terms of any ceasefire remain unclear. Skeptics have been quick to raise issues around tolls collected by Iran at the Strait of Hormuz or the time required to rebuild damaged energy infrastructure. Initial reports suggest that Iran will demand a toll of $1 for every barrel of oil going through the Strait of Hormuz.⁶ Turning the Strait into a politicized transit route could also raise insurance premiums and financing costs across the energy complex.

These risks are real, but incentives matter. Iran has billions of reasons to normalize energy flows. The region’s Arab producers have strong incentives to rebuild infrastructure quickly and preserve market share. A permanently impaired energy system would hurt everyone involved.

Does that mean we’re heading back to $55 a barrel oil?⁷ Not necessarily. But does it suggest that prices can come down from recent peaks while remaining elevated relative to pre-conflict levels? That seems likely, in my view. Ultimately, the psychological shift from not knowing whether there’s an end to believing that there’s one may be more important than knowing the exact date. Markets appear to crave narrative closure more than calendar precision and tend to trade well if/when conditions are simply getting better relative to the deteriorated expectations.

Macro backdrop remains supportive

Beyond the conflict itself, the broader macro backdrop still offers support. Global leading indicators remained resilient.⁸ Inflation expectations are elevated but contained.⁹ And after a tepid core inflation report,¹⁰ the Federal Reserve may even begin to contemplate rate cuts at some point in the future. This isn’t the pristine Goldilocks environment it felt like at the start of the year, but in my view, it remains one that can sustain risk assets.

Bottom line: Perhaps market implications were never fully dependent on the duration of the conflict. Instead, it may depend on whether investors believed the duration was finite.

What to watch this week

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Originally Posted April 13, 2026

Iran war: What’s driving market sentiment? By Invesco US

Footnotes

1. Source: Bloomberg, L.P., April 9, 2026, based on the -0.65% return of the S&P 500 Index since the start of the conflict on Feb. 28, 2026.
2. Source: Bloomberg, L.P., April 9, 2026, based on the option-adjusted spread of the Bloomberg US Corporate Bond Index, which was 84 basis points at the market close on Feb. 27, 2026 and had tightened to 80 basis points on April 9, 2026.
3. Source: Chicago Board Options Exchange, April 9, 2026, based on the CBOE Volatility Index (VIX). The VIX is calculated by using the midpoint of real-time S&P 500 Index option bid/ask quotes.
4. Source: Bloomberg, L.P., April 9, 2026, based on the -0.65% return of the S&P 500 Index since the start of the conflict on Feb. 28, 2026.
5. Source: Bloomberg, L.P., April 9, 2026, based on the 21.85% return of the S&P 500 Index from Liberation Day, April 2, 2025 to April 9, 2026.
6. Source: The Hill, “Iran demands $1 per barrel of oil passing through Strait of Hormuz, paid in crypto,” April 8, 2026.
7. Source: Bloomberg, L.P., April 9, 2026, based on the 2026 trough in the price of West Texas Intermediate crude sweet oil on Jan. 7, 2026.
8. Source: US Conference Board, March 31, 2026, based on the Conference Board Leading Economic Indicator, an economic indicator used for forecasting changes in the business cycle based on a composite of 10 underlying components. It’s currently at 100.15, which is still above its trend of 100.
9. Source: Bloomberg, L.P., March 31, 2026, based on the 5-year US Treasury breakeven rate, which rose to 2.627 on March 31 from 2.448 on Feb. 27. A breakeven inflation rate is a market-derived estimate of future inflation, calculated by comparing the yield on a standard government bond (nominal) to the yield on a Treasury Inflation-Protected Security (TIPS) of the same maturity.
10. Source: US Bureau of Labor Statistics, March 31, 2026, based on the year-over-year 2.6% change in the core Consumer Price Index (CPI).

Important information

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All data is based on the US dollar.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

A basis point is one-hundredth of a percentage point.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 Index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.

Inflation is the rate at which the general price level for goods and services is increasing.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

A risk asset is generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.

The opinions referenced above are those of the author as of April 10, 2026. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.