THIS is the Day Iran Breaks the Market (& Why Gold is Next)

SUMMARY

Felix Nikolas Prehn, economist and former investment banker, analyzes the unexpected strength of the S&P 500 during the ongoing conflict with Iran, despite surging oil prices and rising inflation. He explores the implications of a potential peace deal on oil, inflation, interest rates, and gold, offering strategies for investors to navigate both possible outcomes.

MAIN POINTS

• Despite eight months of war with Iran, the S&P 500 is up 10% while oil prices have surged over 50%. [2:00]
• Major tech stocks experienced sharp declines as money rotated into energy and staples, highlighting sector shifts during geopolitical uncertainty. [6:01]
• A three-week period following a temporary US-Iran deal saw oil prices drop 28%, smaller companies hit record highs, and energy stocks fall. [11:01]
• If a peace deal is signed, oil prices could fall, pulling inflation and interest rates down, but if talks collapse, oil may spike to $130, keeping inflation and rates elevated. [14:01]
• Gold has fallen about 27% during the conflict, largely due to central bank sales in oil-importing and Middle Eastern countries to support currencies and budgets. [20:00]
• Investors are advised to assess each holding based on its sensitivity to oil and interest rates, preparing for both peace and continued conflict scenarios. [23:01]

DETAILED ANALYSIS

Over the past eight months, the United States has been engaged in a conflict with Iran, resulting in a dramatic rise in oil prices—over 50%—yet the S&P 500 has defied expectations by climbing 10%, a return typically seen in a stable year. This divergence from conventional market behavior during wartime is attributed to the forward-looking nature of equity markets, which began to price in the possibility of peace even as hostilities continued. The initial panic led to an 8% drop in the S&P 500, but subsequent resilience was fueled by robust corporate profits, especially from AI and technology sectors, and sustained consumer spending, with GDP growth reaching 3.4% in the third quarter.

Despite market gains, American households have faced significant financial strain. Inflation rose from 2% to 3.7%, with energy costs surging—petrol up 34% and fuel oil up 74%. The Federal Reserve responded by raising its benchmark rate to 4%, pushing the average 30-year fixed mortgage rate from 5.9% to 7.2%.

This increase translates to an additional $333 per month on a $400,000 mortgage, or $120,000 over the loan’s lifetime. Meanwhile, government borrowing costs have risen sharply, with the 10-year Treasury yield jumping from 4% to 5.3%.

A pivotal moment occurred between June 15 and July 8, when a temporary US-Iran agreement mediated by Qatar led to a rapid 28% drop in Brent crude prices, record highs for the Russell 2000 and Dow Jones, and a surge in the Nasdaq. Energy stocks, in contrast, fell as the prospect of cheaper oil threatened their margins. However, the deal collapsed in early July, and oil prices rebounded.

This brief window provided a preview of how markets might react to a lasting peace: sectors sensitive to lower oil and interest rates—such as small caps, airlines, transport, and housebuilders—would likely benefit, while energy stocks could underperform.

Diplomatic efforts continue, with Qatar shuttling proposals between Washington and Tehran. Iran’s demands include lifting port blockades and oil sanctions, and while some signs of progress exist, no agreement has been reached. Oil traffic through the Strait of Hormuz remains volatile, and prices recently hovered around $112 per barrel.

The outcome of these talks will have significant macroeconomic consequences. Should a deal be signed, oil prices could fall to $75–$80, easing inflation and potentially prompting the Fed to pause or reverse rate hikes. Mortgage rates and government borrowing costs would likely decline, stimulating consumer spending and supporting equity markets.

Conversely, if negotiations fail, oil could spike to $130, sustaining inflation and increasing the likelihood of further rate hikes.

Gold, traditionally seen as a safe haven during turmoil, has confounded expectations by falling about 27% since the conflict began. This decline is largely due to central bank sales, particularly by oil-importing countries like Turkey and by Middle Eastern nations facing revenue shortfalls due to disrupted oil exports. These sales are used to support currencies and fund government operations.

The drop in gold is also influenced by higher interest rates, which make non-yielding assets like gold less attractive, and by the strengthening US dollar, which raises the price of gold for foreign buyers.

Investors are encouraged to assess their portfolios by mapping each holding’s sensitivity to oil prices and interest rates. Sectors such as energy act as insurance in the event of continued conflict, while industries like airlines, transport, and housebuilders stand to gain from peace and lower oil prices. Rather than reacting to headlines, the recommended approach is to prepare for both scenarios, ensuring that investment decisions are guided by an understanding of underlying market dynamics and historical precedents.

LINKS

• Registration for the Great Pivot live training event.
• Winston Metals & Stock App with a 30-day free trial.
• Free research report on the US-Iran peace deal and its market implications.
• Biography of Felix Nikolas Prehn.
• Official website of Felix Nikolas Prehn.
• Essays and writings by Felix Nikolas Prehn.
• Research profile of Felix Nikolas Prehn (ORCID).
• Felix Nikolas Prehn's X (Twitter) profile.

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