Markets have historically tended to post gains during wartime, including double-digit increases during both Gulf Wars three and six months after the onset, led by the defence sector. At the same time however, oil prices may remain elevated if Iran remains under pressure. As the conflict escalates, understanding who benefits from this crisis might be as important as counting its costs.
The energy shock is immediate. Tanker traffic in the Strait of Hormuz has fallen by around 90 per cent. Qatar, the world’s second largest exporter of liquefied natural gas (LNG), halted production indefinitely.
For defence stocks however, the picture is different. The London, England-based BAE Systems surged around 6% on the first day of the conflict. And the American defence industry seems determined to quadruple the production of some weapons.
One of the most uncomfortable truths about this conflict is that while it inflicts pain on some, it creates windfalls for others. Determining who benefits is essential to understanding why wars persist long after it may seem rational to stop.
Defence contractors and the arms economy
On Wall Street, defence firms including the Lockheed Martin Corporation, the Northrop Grumman Corporation and the RTX Corporation rose between 4% and 6% on the first day of the strikes. The three firms’ combined shareholder gain on that one day was US $ 25–30 billion.
In Israel, Elbit Systems Limited briefly became the country’s most valuable listed Company, with its shares up 45% since January. In Europe and the UK, defence stocks surged against a falling Financial Times Stock Exchange 100 Index.
The rally round the flag effect
Wars may also be good for incumbent politicians in the short term. Before the strikes began, the fallout from the release of the Epstein files was reverberating globally, and piling scrutiny on many with connections to the White House. Within hours of the first strikes, web searches for the Epstein files collapsed.
But perhaps the most counterintuitive application of the paradox concerns Iran itself. The Islamic Revolutionary Guard Corps (IRGC) controls up to half of Iran’s oil exports. Its engineering arm, Khatam-al Anbiya Construction Headquarters has become one of the largest contractors in the country, controlling construction, telecoms, agriculture and energy.
Economic sanctions designed to weaken Tehran, Iran, have actually entrenched the power structures that they were meant to erode. As foreign firms exited and domestic companies struggled, the IRGC-linked entities used access to informal trade routes, currency controls and security networks to expand their dominance.
At the same time, according to the World Bank, close to 10 million ordinary Iranians fell into poverty between 2011 and 2020 as the sanctions tightened.
The energy windfall
The oil and gas price shocks are already providing a windfall in unexpected places. The US could benefit as Europe’s reliance on American energy exports, accelerated by the Ukraine war, grows even more.
For the Gulf petrostates, the picture is nuanced. Saudi Arabia and the UAE together hold a huge share of the world’s spare production capacity. They face real costs from the conflict, but their exposure to the Hormuz closure is lower than neighbours Kuwait, Qatar and Iraq. Both countries built bypass pipelines specifically to export oil without transiting the Strait.
And for Russia, the war diverts price-sensitive buyers such as India and China away from competing suppliers in the Gulf.
The green transition
Higher oil and gas prices make new fossil fuel extraction more commercially attractive. The same crisis that bolsters the case for renewables also makes fossil fuels more profitable. This could slow the transition by redirecting attention back towards oil and gas.
In the context of this conflict, that fundamental points towards four routes.
The first would be a windfall tax on companies benefiting exceptionally from wars. The UK already has a precedent: its energy profits levy hits oil and gas profits above a set threshold until 2030. Although this levy has come under fire recently, there is a strong case for extending its principles to defence contractors whose share prices and profits surge during conflicts.
For oil-producing Nations, a release of emergency stocks coordinated by the International Energy Agency (IEA) could cap price spikes. This happened in 2022 when IEA member countries released 60 million barrels from strategic reserves. The Group of Seven nations have now said that they “stand ready” to do this.
On the political side, democratic accountability, independent economic institutions and a free press all narrow the window within which leaders can exploit wartime popularity. These things cannot always be changed from the outside however, and underline the need for robust domestic institutions.
The green transition paradox is perhaps the hardest to address in the short term, but it is also where the fix is the clearest. It has been argued that the more dependent economies become on the profits of war through arms exports, fossil fuel revenues or defence procurement, the harder it becomes to divert funding and attention to climate issues.
The solution is not to stop countries defending themselves – but to ensure that the transition to a green and secure energy system proceeds, precisely because of crises like this one.
The costs of this war are already being counted in energy markets. Before long, they will show up in national and household budgets. What makes this crisis particularly hard to resolve is the paradox at its heart: the actors best placed to end it are among those with the most to gain from its continuation.
The US-Israeli attack on Iran, followed by retaliatory strikes from Iran expanding across the region, has left many US investors wondering what is at stake domestically and for financial markets.
The length of the conflict remains a key risk that could add to economic and market volatility if it is not resolved quickly.
Seven things that investors to should consider
- Conflict duration
Conflict longer than a few weeks raises the odds of sustained economic pressure through higher oil prices, hotter inflation and less-certain financial conditions.
“Markets may tolerate uncertainty for now, but prolonged uncertainty will be harder to look through,” said the Head of US Policy, Morgan Stanley Wealth Management, Monica Guerra.
- The Strait of Hormuz is a key macro lever
Conflict in Iran directly threatens the Strait of Hormuz, the world’s most critical oil chokepoint, because Iran can use the narrow waterway as a strategic lever to retaliate for US or Israeli actions. As the passage for about one-fifth of global oil and LNG consumption, disruptions or even threatened closures can elevate gasoline prices, fan inflation and lead to declines in household consumption.
- Oil shocks can lift inflation quickly
Morgan Stanley Research estimates that a 10% rise in oil prices from a supply shock could lift headline consumer prices in the US by about 0.35% over the next three months. The longer the prices remain elevated, the more meaningful the increase in inflation.
A strengthening US $ could offset some inflationary pressure, as geopolitical instability potentially drives global investors to the perceived “safe-haven” greenback. Still, particularly in a prolonged conflict, risks of increased consumer prices remain
- Higher energy costs may hit consumers with a lag
When oil prices rise due to supply disruptions, households face higher gasoline costs and may initially dip into savings, supporting nominal spending at the aggregate level early on.
“The magnitude of the drag depends on the duration and persistence of higher energy prices.”
- Midterm elections could become more sensitive to affordability
With affordability a key issue in the US midterms, supply-chain pressures and energy prices are top of mind. Conflict duration matters here as well: A Reuters/Ipsos poll reported only about 27% approval for the US strikes, but a short, contained conflict may result in public dissatisfaction fading quickly. A longer episode however, could keep political attention focused on cost-of-living pressures.
- The Fed faces a supply-shock tradeoff
In an energy-supply shock, the Fed is likely to avoid big, sudden interest rate moves, instead favouring smaller changes, or pausing, while it watches incoming data. The reason: Tightening monetary policy to fight inflation can also slow growth and hiring, while easing policy to support the economy can add fuel to inflation.
7. Defence spending could raise deficits further
US engagement with Iran, as well as involvement on other fronts, could increase defence spending close to the President’s $ 1.5 trillion defence spending request — a 50% increase to the defence budget and a level not seen since the Korean War.
This sharp spending rise would add more to the US Government’s already outsized debt and deficits. That, in turn, could put further upward pressure on Treasury term premiums, or the additional yield that investors demand to hold US Government debt when fiscal trajectories look more challenging. Higher longer-term Treasury yields often weigh on valuations of stocks and pressure long-duration bonds, which may exhibit greater volatility.
From a longer-term perspective, the geopolitical risk is becoming a persistent part of the backdrop, not merely episodic. Investors may need to price in a world where regional blocs and strategic competition drive markets, risk premiums and asset allocation.
Peace benefits ordinary citizens, small businesses, global supply chains and the planet’s climate trajectory. The beneficiaries of war are more concentrated.
The writer is an international security analyst and anthropologist
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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication