Escalating tensions between the United States and Iran have once again injected volatility into global financial markets. The major indexes all dropped Thursday amid the uncertainty of whether Iran and the United States can come to deal. Whenever geopolitical risk rises in the Middle East, especially when involving a major oil producer, the implications can be wide reaching across many sectors, with the impacts ranging from positive to negative depending on the sector. While the major stock indexes reacted negatively, the impact is far from uniform across the whole market. Some market sectors dropped significantly, while others strengthened as there are sectors that can be seen as beneficiaries to the instability.
When international tensions escalate, major indexes like the S&P 500 and Nasdaq often experience short-term losses as a result. This reaction is driven less by economic data, but more so by the uncertainty and what the tensions could mean for military escalation and what those impacts could have on areas of the market, such as oil supply.
Historically, these selloffs can be significant, but also temporary if tensions were to de-escalate and a deal between countries is made. However, if the conflict lingers and threatens energy infrastructure or major trade partners, this impact could become more long term.
Sector Impacts
While there are many sectors impacted by the potential conflict, the most direct market impact comes through energy prices. Iran plays a key role in global oil supply, and concerns over supply disruptions can push crude prices higher. Roughly 20% of global seaborne oil passes through the Strait of Hormuz, making it one of the most important geopolitical transportation routes. With oil prices rising, some of the major oil producers such as ExxonMobil and Chevron often see share price gains because of these oil spikes. Both companies saw slight gains on Thursday, with their stock’s rising around 1%.
Other areas of the market that can benefit from the conflict are defense and manufacturing companies. Defense contractors frequently attract investor buying interest during geopolitical tensions due to the expectation of increased military spending. Defense companies such as Lockheed Martin and Northrop Grumman for example, saw their stocks significantly outpace the market on Thursday, rising by 2.57% and 1.65% respectively.
While there are segments of the market that benefit, there are many others that are negatively impacted by the conflict, among those are the technology and travel sector. Historically technology often suffers during geopolitical tension, with the main reasons being increased fears of inflation, as well as future earnings being dragged down depending on how long the conflict lasts.
As for the Airline and Travel sector, a prolonged conflict could have massive implications for various reasons. As fuel prices rise for Airlines, these costs can be passed onto the consumer, making it even more expensive to travel. This increase in cost, coupled with the lack of demand for travel to certain parts of the world, makes it a very challenging time for the airline industry during conflict. American Airlines and Delta Air Lines both reflected this uncertainty on Thursday, with their share prices dropping over 5% on the day.
Moving Forward
Looking ahead, the outcome of negotiations between Iran and the United States remains uncertain. What is clear, however, is that markets react not only to the events themselves, but to expectations surrounding the potential duration and overall scope of the conflict. While the timeline is unknown, prolonged tensions historically create identifiable impacts across specific sectors, benefiting some while hurting others. If tensions remain contained, equity markets often stabilize and recover, allowing sectors to return to more typical trading behavior.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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