'Challenging for investors': What Wall Street strategists are saying about the US strikes on Iran

Wall Street is closely watching escalating tensions in the Middle East after President Trump confirmed that the US launched a surprise strike on Iran’s nuclear sites late Saturday, marking the country’s official entry into the two-week-old conflict.

“The strikes were a spectacular military success,” Trump said in an address at the White House Saturday evening. “Iran’s key nuclear enrichment facilities have been completely and totally obliterated.”

The president, who referred to Iran as the “bully of the Middle East,” said the country “must now make peace.” He added, “If they do not, future attacks would be far greater and a lot easier.”

Markets have held mostly steady in the aftermath of the escalation. US stocks opened modestly lower on Monday but rebounded by mid-morning, with gains led by the tech-heavy Nasdaq Composite (^IXIC) and benchmark S&P 500 (^GSPC).

Additionally, bitcoin (BTC-USD) prices, often viewed as a barometer of risk appetite, edged around 2% higher to trade near $102,000 a coin. WTI crude (CL=F) and Brent (BZ=F) futures initially jumped when futures trading began on Sunday but reversed course Monday morning, falling to about $73 and $76 per barrel, respectively.

Until now, most strategists have said markets largely dismissed the risk of a prolonged conflict, with investors still weighing the potential for unintended consequences following US intervention.

Nicholas Colas, co-founder of DataTrek Research, said in a research note Monday that markets are likely to discount downside scenarios and could even resume their rally despite continued negative headlines.

“The disconnect between human nature’s focus on the present and markets’ forward-looking gaze is an under-appreciated reason why volatility of the sort we will see this week is so challenging for investors,” he said.

But with direct US military engagement now underway, markets may be forced to reprice risk, especially if oil prices continue to rise, threatening to reverse recent disinflation trends and further strain consumers already grappling with elevated costs.

“It has been and remains our belief that the longer and broader the conflict becomes, the more challenging it could be for US equities,” Lori Calvasina, head of US equity strategy research at RBC Capital Markets, wrote in a Sunday evening note to clients. “These escalations come at a tricky time for US equities, as the S&P 500 has looked fairly valued to us (perhaps a bit overvalued) from a fundamental perspective, with more room to run from a sentiment perspective.”

The analyst said her three main concerns include: first, the risk that rising national security uncertainty could weigh on equity valuations; second, the possibility that renewed geopolitical tensions could stall the recovery in sentiment that began after the early April tariff lows; and third, the potential for a spike in oil prices, which could fuel inflation concerns.

Read more: How to protect your money during turmoil, stock market volatility

Citi analyst Stuart Kaiser agreed that sharply higher oil prices remain “the channel for geopolitical risks to impact stock markets,” identifying crude prices “well above $80 a barrel” as a critical threshold for concern.

Kaiser added that options markets are now pricing in a 10% chance that oil surges 20% over the next month, up from just 2.5% two weeks ago, reflecting mounting tail risks as the conflict deepens.

Still, Neil Shearing, group chief economist at Capital Economics, wrote on Monday that oil prices “would need to climb much higher, and stay higher for much longer, to really pose an inflation threat.”

“Past flare-ups in the region have seen prices fall back quickly, offering some reassurance,” he said. “But in a world of radical uncertainty, there’s less confidence that history will repeat itself.”

‘Stagflationary‘ risks

Wall Street analysts have warned that a prolonged conflict and the potential closure of the Strait of Hormuz could drive oil prices as high as $130 a barrel, pushing US inflation back toward 6%. So far, that risk seems mostly contained, with markets cautiously monitoring developments but not yet pricing in a worst-case scenario.

But here’s the concern: A sharp rise in energy prices would likely reverse the recent disinflation trend in gas prices.

According to the latest May CPI report, prices at the pump have fallen 12% over the past year. The government’s energy index declined 1% month over month in the most recent reading. If those trends reverse, economists warn that an inflation rebound could delay interest rate cuts until early 2026 as the Federal Reserve balances its dual mandate of price stability and maximum employment.

While the Fed typically focuses on “core” inflation, which excludes volatile energy prices, higher energy costs could ripple through the supply chain and raise prices across a wide range of goods and services.

“You’re looking at a potentially more ‘stagflationary’ scenario out of that,” Bank of America senior US economist Stephen Juneau told Yahoo Finance on Monday. “Of course, this has to persist. We’re still at a point where oil prices are relatively low compared to a year ago, so we’ll just have to see how things unfold from here. I think it’s too early to say.”

Correction: A previous version of this article attributed Neil Shearing of Capital Economics to a different firm. We regret the error.

Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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