Markets Adjust as Energy and Inflation Risks Evolve

Wednesday, April 8

Week Six Update | Ceasefire Announcement

Late Tuesday, the U.S. and Iran agreed to a two-week pause in hostilities, brokered by Pakistan. Iran agreed to reopen the Strait of Hormuz for the duration. Talks are scheduled Friday in Islamabad. Israel has also agreed to suspend strikes.

Today’s ceasefire announcement has reduced uncertainty around the duration of the Iran war. In response, markets have rebounded, leaving the S&P 500 only 3% below its all-time high. The recovery reflects a moderation in expectations around long-term damage to energy infrastructure and a more pro-longed war, as well as the continued strength of U.S. economic indicators throughout the conflict.

The ceasefire itself may or may not hold, but what may matter more is what it signals: all parties want this war to end. That is a meaningful shift in the probability distribution for duration — and duration has been the central variable driving markets since week one. A conflict that all sides are actively trying to exit is a fundamentally different risk than one where any party is committed to escalation.

What is happening in markets right now?

Markets continue to reprice three variables:

The probability of sustained disruption to global energy supply
The path of inflation
The likely response from central banks

Recent developments have reduced the probability of an imminent supply shock. This is reflected in the sharp decline in front-month oil prices and the moderation in near-term inflation expectations. However, the adjustment has been concentrated in the near term. Longer-dated energy futures, which moved higher during the escalation, have not meaningfully retraced.

The S&P 500 stands 3% below its all-time high. The resilience of equity markets throughout this conflict has reflected a view that the economic damage, while real, would not be permanent.

The signal is clear: markets are lowering the probability of an immediate shock while holding judgment as to the assessment of persistent geopolitical risk. Expectations are being recalibrated, not reset.

What To WAtch

Energy remains the primary transmission channel into broader markets.

Energy Prices: The decline in oil prices reflects a reduction in the perceived probability of immediate disruption, but the elevated level of longer-dated futures indicates that markets continue to price a higher likelihood of ongoing or recurring supply constraints. The behavior of longer-dated energy futures remains the most reliable test of whether markets are genuinely reassessing duration risk. A sustained retracement in 3- to 5-year forward prices would signal that the inflation and growth outlook is durably improving. Front-month moves, while encouraging, are not sufficient on their own.

Inflation: This energy price dynamic is also reflected in inflation expectations. While near term pressures have eased alongside the move in energy, longer term inflation breakevens remain elevated relative to pre-escalation levels and have not yet meaningfully reversed. A change in this trend would be meaningful to the economic outlook, and Central Bank policy.

Policy signaling: Communication from the Federal Reserve and other central banks will be important in assessing how policymakers interpret the balance between resilient growth and lingering inflation risks. Markets will be attentive to any shift in guidance regarding the timing of potential policy easing.

Diplomacy: Friday's talks are the near-term variable. The gap between the two sides' opening positions is wide. How that gap narrows — or doesn't — will determine whether today's relief becomes something more durable.

The key point: near-term risks have moderated, but the broader inflation and energy backdrop does not yet reflect a move toward normalization.

Our Perspective

The most important takeaway from this week is not the ceasefire itself but what it reveals about the intentions of all parties. A war that everyone wants to end is more likely to end. That reduces the tail risk of a prolonged disruption — the scenario that would have done the most lasting damage to energy markets, inflation, and growth.

If progress toward an end to the war continues, we would expect the economic effects of six weeks of conflict will normalize gradually, not immediately. A shift in longer dated energy contracts would indicate that the direction of travel has shifted in a meaningful way. We continue to favor businesses with strong pricing power, resilient balance sheets, and flexibility — and will become more focused on entry points as the longer-term picture clarifies and the risk/reward improves.

Wednesday, April 1

Week Five Update | Conflict Continues to Widen

The initial question — whether the conflict would remain short and contained — has effectively been answered. It is not short or contained. The follow-on question — whether it will be substantially prolonged — remains unresolved. With the five-day pause in strikes against Iranian energy infrastructure set to expire on April 6, and with tonight's address from President Trump introducing an additional near-term variable, markets are closely watching for any signals that clarify the path forward.

What is happening in markets right now

The two forward-looking variables we identified at the outset — longer-dated energy futures and inflation breakevens — moved materially during week three of the war and have remained at those elevated levels over the past ten days.

Energy prices. Spot oil sits at approximately $100 per barrel, roughly 47% above its pre-war level of $70. The more consequential signal is in longer-dated prices. The December 2026 Brent futures contract is currently around $80 per barrel — approximately 10% above its pre-war level. More importantly, 3- and 5-year forward contracts, which held steady in the early weeks of the conflict, have now moved higher as well. That initial stability was being read as a signal that real buyers of oil expected a short and contained outcome. The fact that longer-dated contracts are now rising tells us that expectation is fading — companies and countries locking in energy costs years out are beginning to price in a more prolonged disruption, and that shift has not reversed despite recent commentary around possible near-term exit strategies.

Inflation expectations. The 5-year inflation breakeven in the US Treasury market stands at 2.56%, up from approximately 2.2% before the war. Longer-term expectations around inflation remain more anchored, consistent with central bank commentary — but the direction of travel is higher. The bond market is not treating the inflationary impact of this conflict as purely transient.

Interest rates. Four weeks ago, the probability of a Federal Reserve rate hike before year-end was effectively zero. Futures markets have now moved that probability to 52%. The Fed is no longer on a path toward interest rate cuts. The question has shifted to how long it can hold its footing if energy costs remain elevated.

Equities. Major indexes remain sensitive to geopolitical headlines, with volatility elevated. In the context of a conflict of this scale, the magnitude of the equity pullback so far remains limited — which itself raises the question of whether markets have fully discounted a scenario in which this proves more prolonged.

Recent economic data releases in the U.S. reflect a relatively resilient economy, albeit with meaningful increases in price gauges. Thus far, the resilience of economic data has been a stabilizing force for markets, as well as the outlook for earnings.

What to Watch

The April 6 deadline. If strikes on Iranian energy infrastructure resume, markets are likely to reinforce the view that inflation pressures could persist well beyond the conflict's duration. If the pause is extended and de-escalation is signaled, some of the longer-term concern may soften.
Tonight's address. The focus will be on substance rather than tone. Any new information — particularly around infrastructure, the Strait of Hormuz, or the terms of any potential agreement — could move markets.
Energy infrastructure and recovery timelines. The distinction that mattered in week three remains the central issue: natural gas infrastructure, once destroyed, does not recover on the timeline of a reopened shipping lane. Whether the damage already done represents a temporary disruption or a structural impairment to supply is the question with the longest tail.
Global alignment. Early diplomatic engagement — Pakistan hosting talks, Egypt acting as intermediary — is visible but has not produced movement. Whether meaningful coordination emerges, or countries continue on separate paths, will influence both duration and energy market stability.
The opposition. The Iran Freedom Congress convened March 28. Internet jamming inside Iran remains near-total. No material change in the internal political situation. This remains an open variable with direct implications for the timeline for ending the war. We are watching closely.

Our perspective

Markets have not fully discounted the possibility of a prolonged disruption, which makes the risk/reward in many pockets of the market uncompelling at current levels. Even if the conflict begins to de-escalate, its economic effects are unlikely to fade quickly. Energy markets, supply chains, and inflation expectations typically take time to normalize after a shock of this scale — and that adjustment process extends well beyond the headlines.

We continue to emphasize discipline. The current environment favors businesses with strong pricing power, resilient balance sheets, and flexibility. We are holding dry powder, keeping entry points selective, and relying on the architecture — quality, liquidity, and pricing power — that is designed for exactly this kind of environment.

Monday, March 23

Interim Update | Pause Announced

Today, President Trump announced a five-day pause on planned attacks targeting Iran’s energy facilities, such as oil and gas infrastructure. This decision comes amidst the significant pressure that last week’s sharp rise in future energy and inflation expectations placed on the global economic outlook.

The announcement caused oil prices to fall sharply as traders lowered the probability of further damage to energy infrastructure—damage that would take years to repair. Rising infrastructure risks were the primary driver behind last week’s sharp move higher in long-term energy prices and inflation expectations

The timing of the pause is notable beyond the markets. It expires on March 28, the same day the Iran Freedom Congress—a forum of Iranian opposition figures—is scheduled to convene, where leaders including Abdollah Mohtadi and Hamid Esmaeilion will present an opposition-led transition framework. Organizers highlight a level of coordination not seen since 1979, with opposition groups coming together at a moment when Washington will be weighing its next move.

Saturday, March 21

Week Three Update | Longer Dated Energy and Inflation Expectations

The central question we have carried through each of these updates — whether this conflict will remain contained and short or widen into something more prolonged — received its most consequential answer yet this week with the deliberate targeting of gas production infrastructure at a global scale. That shift is not a new story — it is a powerful intensification of the two variables we have been watching most closely as forward indicators of long-term risk: duration and inflation. The targeting of energy infrastructure has moved the conversation from near-term energy supply disruption to something with the potential to reshape the energy landscape for years regardless of the outcome of the war.

What is happening in markets right now

The most consequential market signal this week came from the forward curves. In our first two updates, we identified two forward-looking variables as the most reliable indicators of long-term risk: the slope of longer-dated energy futures relative to spot, and five-year inflation breakevens in the US Treasury market. Through the first two weeks, both remained relatively contained. This week, both moved materially. Longer-dated futures moved meaningfully higher in absolute terms — a signal that companies and countries are beginning to price elevated energy costs further into the future, not just in the near term. Inflation breakevens reached their highest level of the conflict. The bond market is beginning to price in an inflation path that is not just near-term but structural. The reason is not hard to find.

What to Watch

The stagflationary risk embedded in this conflict grew materially this week, as escalating attacks on energy infrastructure extended the timeline for recovery well beyond what the conflict's duration alone would dictate.

Energy infrastructure and geographic scope. Israel struck South Pars — the world's largest natural gas field, shared between Iran and Qatar — on Wednesday. Iran responded by attacking Ras Laffan Industrial City, Qatar's principal LNG export hub, knocking out an estimated 17% of Qatar's LNG export capacity and causing damage that QatarEnergy's CEO said will take three to five years to repair. Qatar accounts for roughly 20% of global LNG exports, nearly all of it processed at Ras Laffan.
Wood Mackenzie, a leading global energy research and consultancy firm, called the attacks a fundamental reshaping of the global LNG outlook. The distinction from earlier disruptions is important: natural gas infrastructure, once destroyed, does not recover on the timeline of a reopened shipping lane. This is the development that drove the move in forward curves and breakevens this week.

China. Beijing has not intervened, but the arithmetic is worsening. A Qatari LNG disruption lasting years is not something China absorbs through reserves alone. India is already in active negotiations with Iran to move tankers through the Strait — two ships have passed. These are early signs that no one expects a quick reopening.

Inflation and monetary policy. Monetary policy is now reflecting the pressure of this week's moves in energy markets. The Federal Reserve held rates steady at their meeting this week, but the direction shifted: Governor Waller said he reversed his planned vote for a cut because the conflict looks 'much more protracted.' By Friday, futures markets moved sharply to increase the possibility of a rate hike before year end — essentially zero three weeks ago. The ECB postponed planned cuts on March 19, raised its inflation forecast, and cut its growth projection. Citigroup projects that average Brent will rise to $130 in Q2 and Q3 if infrastructure attacks continue and the Strait stays closed. Brent closed the week at $106.

The conditions that prevented a credible opposition voice from emerging in Week 2 have not changed. Internet jamming inside Iran remains near-total, and infighting among exile groups continues. Whether meaningful internal dissent emerges remains a critical unknown with direct implications for the timeline for ending the war. We are watching closely.

Our perspective

Our assessment is direct: the outlook for duration, inflation, and growth each deteriorated this week. The infrastructure damage to global LNG supply is not a disruption that resolves with a ceasefire — it is a structural impairment to energy markets that will persist for years. That changes the inflation calculus in a way that the prior two weeks did not. Central banks that were on hold are now being pushed toward tightening. Growth forecasts are being cut. The stagflationary risk that was a tail scenario three weeks ago is now a more significant possibility. An open question is whether political decision makers will respond to these rising structural risks.

On portfolio tactics, we are remaining disciplined with dry powder. The deterioration across these key variables means that entry points must be lower to properly compensate for rising risks. Quality, liquidity, and pricing power remain the architecture we rely on — and in an environment where inflation is becoming more structural and growth more pressured, those attributes matter more.

Wednesday, March 11

Week two update

The central question for markets since the Iran conflict began has been whether it will remain contained and short or widen into something more prolonged. The three adjacent threads we wrote about last week — geographic scope, China, and inflation — have not moved in a positive direction over the past week.

What is happening in markets right now

Equity markets, taken at face value, have not moved dramatically. The S&P 500 sits roughly 3% off its highs — a measured response given the scale of what is unfolding. Whether that reflects genuine confidence in a swift resolution, or an underestimation of the risks we have outlined below, is a question. What is certain is that portfolios have not yet been stress-tested by a scenario in which this conflict proves more prolonged.

Oil crossed $100 per barrel — the threshold we specifically flagged as the one that would change the calculus for central banks — briefly extending higher before pulling back. This is the first time prices have been at that level since Russia's invasion of Ukraine in 2022. At the pump, the national average for regular gasoline has risen roughly 20% since the strikes began. The rotation within equities has deepened: energy and defense names continue to hold, while rate-sensitive sectors, airlines, and consumer-facing companies have come under increasing pressure. The Federal Reserve, which was on a path toward rate cuts, is now in a more difficult position.

Two signals worth noting: longer-dated oil futures remain well below current spot prices, suggesting that companies and countries purchasing oil have not yet abandoned the view that this is a temporary disruption rather than a permanent structural shift. At the same time, five-year inflation break evens in the US Treasury market have moved somewhat higher but are still within the range set over the past several years. This indicates that the medium-term inflation outlook remains relatively contained. These gaps are two important forward-looking variables to monitor in the days ahead as indicators of rising long-term risks. We like them because they are somewhat less vulnerable to short-term trading and other non-economic factors.

What to Watch

From a market perspective, the variables that mattered a week and a half ago still matter most today. The key question of duration remains central.

The three threads we mentioned that tie into duration have become more consequential.

Geographic scope. The perimeter of this conflict has grown, not contracted. Iran and Hezbollah carried out a joint attack on Israel, while Israel has launched large-scale strikes in Lebanon and established a ground presence in the south. Qatar declared force majeure on a significant portion of its LNG exports after Iranian drone attacks, and Saudi Aramco's Ras Tanura terminal has also been forced to close. The conflict the market was pricing as bilateral and contained 9 days ago is neither of those things today. The widening geographic scope makes it harder for the US to pull out, thus extending the potential duration.

China. China is among the largest recipients of crude oil transiting the Strait of Hormuz, receiving a significant share of the nearly 15 million barrels per day that passed through the waterway in 2025. A sustained disruption to those flows creates exactly the supply shock for the world's second-largest economy that we flag as a risk. Beijing has thus far stopped short of meaningful intervention, but analysts continue to watch whether China uses this moment to seek broader concessions from Washington on trade and Taiwan — a dynamic that has not resolved.

Inflation. The International Energy Agency (IEA) has described the current disruption as the largest supply shock in the history of the global oil market. The U.S. and IEA have coordinated a release of 400 million barrels from strategic petroleum reserves, although analysts note it can only partially offset a prolonged disruption. Moreover, the calculus for the Federal Reserve has changed. Rate cuts are no longer the near-term story. The question now is whether sustained energy costs above current levels begin to feed more broadly into prices —research says yes. The next question becomes how long the Fed can hold its footing if they do.

Refining capacity and other oil infrastructure are both critical factor in the inflation equation as well. If there is a lack of refining capacity oil cannot be refined into usable products. The Saudi Aramco-operated Ras Tanura refinery, one of the world's largest, was targeted and shut down following a drone strike/projectile hit on March 2, 2026. A fire was contained, and the facility was temporarily shut for assessment. It was struck again on March 4, though with no major disruption reported. So far it seems that this facility has escaped serious damage, which is an important lynchpin to energy availability and price stability.

The emergence of a credible opposition voice in Iran could clearly impact duration as well. This has not happened. Those with the most credibility are inside Iran, and are currently being silenced by the nearly 100% jamming of the internet and other forms of communication. Also, there is infighting amongst parties outside of Iran. We are keeping a close eye on all elements of opposition because of the potential significant impact on the timeline for ending the war.

Our perspective

The "short and contained" case that markets were reflecting on March 2nd has been tested. The situation has evolved materially since then. At the same time, futures markets have not abandoned the view that resolution is coming — and history suggests that is usually the right instinct to hold onto, even when the near-term picture is difficult.

On portfolio tactics, deteriorating trends in the critical inputs discussed above means that we will hold onto dry powder longer. While there are companies with relatively attractive valuations currently that will most certainly make it through this crisis , rising risks nevertheless demand more favorable entry points.

The broad asset allocation decisions we made with you before this crisis matter most. Properly sized Funding accounts mean sufficient liquidity is available if this war lasts longer. A growth portfolio built around high-quality companies with strong balance sheets, durable pricing power, and low debt is meaningfully better positioned in an inflationary, higher interest rate environment than one that is not.

On the Strait of Hormuz and Asia's vulnerability - Asia is a direct concern. Nearly 15 million barrels per day of crude oil passed through the Strait in 2025, the majority destined for Asia — with China and India alone receiving 44% of those exports. Japan and South Korea also are heavily reliant on flows through the Strait. Your portfolio carries some international exposure in this region, and we are reviewing those positions actively — evaluating where that exposure is concentrated, how the underlying businesses perform in a prolonged high-energy-cost environment, and whether the current sizing remains appropriate.

Monday, March 2, 2026

Over the weekend, the U.S. and Israel launched coordinated strikes on Iran. Iran retaliated within hours with missiles and drones targeting Israel and U.S. military assets across the Gulf — striking Bahrain, Saudi Arabia, Qatar, the UAE, Kuwait, and Jordan. Civilian infrastructure, including major airports and ports, was also hit. It was subsequently confirmed that Supreme Leader Ayatollah Khamenei and dozens of senior officials were killed in the strikes. Iran has established a temporary leadership council. This remains an active and fast-moving situation now entering its third day. Markets have so far responded with more discipline than alarm — but the variables that matter most are still unresolved.

What is happening in markets right now

Markets have reacted largely as one would expect — and so far, with more discipline than alarm. Oil approached $80 a barrel this morning before retreating to $77, up 7% since Friday. This is a meaningful move but not a disorderly one given that prices had already risen nearly 15% this year before the strikes. Equity markets opened sharply lower but recovered through the day, with the S&P 500 finishing nearly flat. International markets closed lower, having sold off before the U.S. recovery took hold and facing the additional headwind of a strengthening dollar. The rotation within equities tells the real story — energy and defense stocks gained, airlines and travel names fell, and quality, cash-rich companies held relatively well. Bond yields, after initially falling, moved higher as inflation concerns reasserted themselves and expectations for near-term rate cuts diminished.

The overall message from markets today is that investors are pricing in a short and contained conflict. That assumption bears watching.

What to Watch

From a market perspective, the single most important variable is the duration of the conflict. Most analysts currently expect a conflict measured in weeks, not months. That base case is reflected in today's relatively orderly market behavior. But three threads deserve close attention.

The first is whether this widens further. Iran has already struck nine countries. Hezbollah has re-entered from Lebanon. The Houthis have resumed attacks in the Red Sea. The perimeter of this conflict is larger than markets may be fully pricing.
The second is China. Iran's oil exports flow almost entirely to China. Any sustained disruption to those shipments — whether through direct military interference or a broader closure of Gulf shipping lanes — would create a meaningful supply shock for the world's second largest economy, with ripple effects across global trade and equity markets that go well beyond energy stocks. China has publicly condemned the strikes but stopped short of meaningful support for Iran, and analysts are watching carefully whether Beijing uses this moment to seek broader concessions from Washington on trade and Taiwan.
The third is inflation. Sustained oil above $100 would materially change the calculus for the Federal Reserve and other central banks — delaying rate cuts, pressuring bonds, and adding a headwind to equity valuations that are already not cheap. A chokehold in the Strait of Hormuz could be a catalyst. We are not there yet, but it is the scenario worth modeling.

Our perspective

This is a genuinely significant geopolitical event — not a routine flare-up. The death of Iran's Supreme Leader, active U.S. military engagement, the potential of a closed Strait of Hormuz, and Iranian strikes across nine countries represent a meaningful and still-evolving shift in global risk. Markets are still finding their footing — and that is appropriate given what is unfolding.

That said, the framework for thinking about this has not changed. We have always built your portfolio with the understanding that the world is unpredictable — that geopolitical shocks, inflation surprises, and acute volatility are not exceptions to the plan; they are part of it. Diversification, quality, and strategic patience are the architecture we rely on precisely in moments like this one.

What we are watching most closely is whether this conflict remains contained and short, or whether it widens into something more prolonged. Those are two very different outcomes with very different implications. We will continue to monitor developments.

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ABOUT THE AUTHOR

Susan Dahl is a seasoned executive, industry leader, and dedicated client advisor, with over thirty years of international and domestic investment experience working for both large and small organizations. Susan is known for her ability to unravel complex questions, and her steadfast commitment to well-designed process. This background has translated directly into her work on investment process design for private wealth clients, as well as the LEVATUS Integrated Wealth Service model. Susan's investment background spans asset classes and geographies — a combination that is increasingly rare and directly relevant to the complexity her clients navigate.

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