Navigating through the fog of geopolitical uncertainty

Key Takeaways:

• Disruptions to global oil supply stemming from the conflict in Iran pushed oil prices higher last week, sparking volatility in markets. Global equity markets ended the week lower, while Treasury yields moved higher.
• Recent inflation data indicate a gradual easing, but the latest rise in oil prices points to renewed upward pressure ahead.
• Policymakers are expected to leave rates unchanged at this week’s Fed meeting. We view the recent rise in oil prices as a temporary headwind that is likely to delay—but not ultimately deter—the Fed’s path toward one or two additional rate cuts in this easing cycle.
• Despite the uncertainty, several fundamentals remain supportive. Global earnings growth is expected to be solid, tax refunds are running above last year’s levels and may bolster U.S. consumers, layoffs remain limited, and the global economy entered this period with positive momentum.
• While volatility is never comfortable, we remain constructive on the long‑term outlook for the global economy and equity markets, and we encourage investors to maintain a well‑diversified portfolio aligned with their goals.

Stocks and bonds experienced volatility last week as the conflict in Iran and related disruptions to global oil supply weighed on markets. Oil prices were volatile: WTI crude futures approached $120 per barrel before retreating after President Donald Trump signaled early in the week that the conflict could end soon. To help stabilize prices, the International Energy Agency announced a coordinated release of 400 million barrels from member countries’ strategic petroleum reserves, and the United States authorized a temporary purchase of sanctioned Russian oil.

Despite these actions, oil prices remain about 45% above their pre‑conflict level, and markets are concerned that they could stay elevated longer than previously anticipated. While geopolitical shocks have historically had short‑lived market effects, the magnitude of current disruptions suggests it may take time for prices to return toward the 2025 average of roughly $65 per barrel. In this report, we assess the economic and market implications of higher oil prices and outline portfolio opportunities amid the uncertainty.

Jump in oil prices has driven volatility in March

Oil supply disruptions and elevated geopolitical risk have driven a pullback in global equities in March. International markets have underperformed—particularly in Europe and Asia—given their greater reliance on imported energy and heightened exposure to supply shocks. Since the conflict began, Japan, Korea, and the euro area have each declined by 8% or more, and each region imports more than half of its total energy needs. A roughly 2.5% appreciation of the U.S. dollar in March has further weighed on non‑U.S. returns.

February inflation was steady, but upside pressures ahead

Last week’s February Consumer Price Index (CPI) report indicated that inflation remained steady. Core CPI rose 0.2% in February and 2.5% year-over-year, while headline CPI increased 0.3% for the month and 2.4% from a year earlier. The report also offered encouraging signs on shelter costs: owners’ equivalent rent—which constitutes roughly 25% of the CPI basket—advanced 3.2% year-over-year, the slowest annual pace since 2021, suggesting continued moderation in housing inflation. Friday brought January personal consumption expenditures (PCE) price data, with headline PCE rising 2.8% from a year earlier, below expectations, while core PCE edged higher to 3.1%.

However, inflation is likely to firm in the coming months as the recent spike in oil prices passes through to energy components, which account for about 6% of the CPI basket. WTI crude oil futures currently imply a retreat toward roughly $75 per barrel by year‑end—still about 30% above the 2025 close (below $60 per barrel). Under this path, we would expect headline CPI to move back above 3%.

Fed in focus

The Federal Reserve meets Wednesday, with markets widely expecting policymakers to leave the federal funds target range unchanged at 3.50%–3.75%. With no move anticipated, investor attention will likely shift to the updated economic projections—particularly whether officials revise their expected pace of interest‑rate cuts in 2026, after the December median projection indicated a single 25‑basis‑point (0.25%) reduction for the year.

The recent rise in oil prices has pushed near‑term inflation expectations higher, dampening market expectations for Federal Reserve rate cuts in 2026. Whereas futures had priced roughly 50 basis points of easing for much of the year, they now only marginally imply a single 25‑basis‑point reduction in 2026.

While the Federal Reserve targets 2% inflation as measured by the personal consumption expenditures price index, it emphasizes core PCE—which excludes food and energy—as its preferred gauge of underlying inflation. Central banks typically look through supply‑driven oil shocks because monetary policy is ill‑suited to counter them. However, with inflation having remained above the Fed’s 2% objective since 2021, we expect any near‑term uptick in headline inflation to reinforce a patient stance toward additional easing.

That said, we expect a temporary rise in prices to delay—not derail—the Fed’s easing cycle. Labor‑market conditions have loosened from the historically tight levels of recent years, which we think should help support ongoing disinflation in services. Productivity trends have also been favorable: nonfarm business labor productivity grew 2.8% year-over-year in the fourth quarter, helping to limit underlying inflation pressures. In our view, one or two additional Fed rate cuts remain likely this cycle; however, the timing could be pushed later into 2026 or even 2027 depending on the duration of energy‑supply disruptions.

Key drivers point to ongoing resilience

In our view, the size and duration of this oil‑price shock will depend on the length of the conflict, which remains difficult to forecast. Importantly, the global economy is entering this period with healthy momentum.

• Earnings outlook: S&P 500 earnings are expected to grow about 15% in 2026, while international stocks¹ are projected to grow roughly 17%.
• Consumer support: The Internal Revenue Service reports that total tax refunds are more than 9% higher than during the same period last year. While higher oil prices could weigh on spending in the near term, larger refunds may help cushion the impact.
• Low unemployment: Despite slower job growth, signs of firing remain limited. The unemployment rate is 4.4%, and initial jobless claims have averaged 213,000 in 2026—well below the 30‑year average of over 300,000.
• Structural resilience: Structural shifts have, in our view, made the U.S. economy less vulnerable to oil shocks. The U.S. has been a net energy exporter since 2019, which may reduce exposure to external price spikes. In addition, the economy has become less energy‑intensive over recent decades, as the services sector share of output has grown relative to goods‑producing sectors.
• Healthy global activity: Economic momentum was solid heading into this period. The S&P Global Composite PMI—a survey‑based gauge of economic activity—has been in expansion for much of the past year across the U.S., Europe, and Asia, with Japan and China posting their strongest readings since 2023 in February.

Portfolio positioning amid heightened volatility

Volatility may persist in the coming weeks as investors assess the extent of disruptions to global energy markets. Historically, geopolitical conflicts have had disruptive but short‑lived impacts on markets, and that remains our base case. Accordingly, we believe the global outlook remains constructive, and we view recent pullbacks as potentially attractive entry points across global equity markets.

Within equities, we favor U.S. large‑ and mid‑cap stocks, supported by robust AI‑related capital investment and steady U.S. economic growth. The recent pullback in international markets could mark an attractive entry point for long‑term investors in our view; we favor international developed small‑ and mid‑caps and emerging‑market equities, which we think stand to benefit from healthy global earnings growth anticipated in 2026.

While volatility is never comfortable, it is a normal part of investing. In our view, investors are best served by maintaining an investment strategy aligned with their long‑term financial goals rather than reacting to short‑term headlines.

Brock Weimer, CFA
Analyst – Investment Strategy

Weekly market stats

^{Source for all information not cited: FactSet. 
Source: 1. International stocks represented by MSCI AC World ex. USA Index. Past performance does not guarantee future results. An index is unmanaged, cannot be invested into directly and is not meant to depict an actual investment.
Source: FactSet, 03-13-2026. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday.}

The Week Ahead

Important economic data for the week ahead includes the FOMC meeting and PPI inflation data. 

Review last week's weekly market update.