Institute Alert

• On June 12-13, Israel targeted Iran’s nuclear facilities and regime leadership in a preemptive aerial strike. U.S. officials disclaimed any role in the attack, but an impasse in bilateral U.S.-Iran nuclear negotiations may incline U.S. officials to participate later, if — and more likely, when — Iran retaliates.
• Global equity prices were broadly lower, but U.S. Treasury, the U.S. dollar, and crude oil futures prices rose.

• In portfolios that have long-term investment goals, we favor incrementally adding exposure on down days to high-quality U.S. equity asset classes and sectors and staying selective in fixed income.

There had been no major fighting in the Middle East this year — until now — and capital markets had grown more comfortable hoping for tariff negotiations. But last night’s attack punctured that market complacency. Overnight between June 12 and 13, the S&P 500 Index futures fell, while the West Texas Intermediate crude oil futures contract touched its highest level since February 20, 2025.

The attack came on the same day that the International Atomic Energy Agency (IAEA) concluded that Iran has diverted fuel to make nuclear weapons.¹ This decision also exposes Iran to the terms of the Joint Comprehensive Plan of Action of 2015, which limits Iran’s nuclear program to power generation, in return for suspending economic sanctions by the U.S., the U.K., Germany, and France. The agreement also provides for the sanctions to snap back in place if Iran breaks the agreement.²

Even while IAEA inspectors were checking Iran’s nuclear compliance, Iran and the U.S. have been negotiating about Iran’s compliance with the 2015 Joint Comprehensive agreement. However, the IAEA discovered that Iran had increased its stockpile of 60%-enriched uranium by 50% between February 2025 and May 2025 and that Iran now wants to accelerate enrichment.³ Nevertheless, a sixth round of U.S.-Iran talks is slated to begin on June 15.⁴

Although they’ve shown patience in past tit-for-tat strikes, Iran and Israel may feel more urgency now. The IAEA reported that Iran had 408kg of 60% enriched uranium in May 2025, and would need only weeks to enrich at least some of that stockpile to 90%, which is weapons-grade.⁵ On June 12, Iran announced that it has a new enrichment facility and will add equipment to accelerate the enrichment process.⁶ According to U.S. officials, further enriching 42kg of 60%-enriched uranium yields enough weapons-grade material for a nuclear device, so Iran may be weeks away from multiple nuclear warheads.⁷ In announcing the latest attack, Israeli Prime Minister Benjamin Netanyahu promised that the strikes would continue “for as many days as it takes to remove the threat.”⁸

Still, each side faces large challenges to achieve its objectives. Iran has dozens of nuclear facilities, some buried into the sides of mountains, and it is unclear how effectively this and future Israeli attacks will damage Iran’s capacity.⁹ For its part, Iran has promised large missile barrages to overwhelm Israel’s Iron Dome air defense system. Tehran likely also will attack U.S. regional interests, including U.S. bases and possibly oil tankers traversing the Persian Gulf, the Strait of Hormuz.¹⁰ Yet, we believe that the U.S. and possibly even Jordan (whose territory Iran’s missiles fly over to reach Israel) are likely to intercept many Iranian missiles, as they did during two 2024 attacks against Israel. Of the Iranian missiles that got through, the Iron Dome shot down the large majority. Finally, the roughly 1,100 miles between Tehran and either Jerusalem or Tel Aviv give Israel advance warning.

We also doubt strongly that Iran would use a nuclear weapon, but we do believe the regime wants a credible deterrent. That outcome would be problematic enough for the region, but a nuclear-capable Iran very likely would prompt Iran’s neighbors to seek nuclear weapons. Iran’s arch-rival, Saudi Arabia, already has expressed interest.¹¹

In sum, our perspective is that Iran’s drive for a nuclear deterrent still faces significant challenges. But that drive also probably extends the retaliatory missile exchanges and creates foreign policy complications that contribute to financial market volatility and a risk premium in commodity markets.

Our 2025 Midyear Outlook report, released June 10, anticipated further geopolitical conflict, but the uncertain timing of the latest round (or rounds) may extend the market volatility.¹² The end of President Donald Trump’s 90-day pause on reciprocal tariffs comes on July 9, and the president just this week mentioned increasing the levy on automobiles.¹³ The 90-day pause on China’s reciprocal tariffs ends on August 12. Between those two dates, we expect Congress to complete a politically contentious budget bill whose negotiations may add uncertainty. New fighting in the Middle East now should bring forward and ultimately lengthen what may be a challenging summer for capital markets.

For investors who have a long-term focus and value caution here, some cash buffer can make sense. Money market rates are higher than they were the last time major uncertainty landed on financial markets, at the beginning of the COVID lockdowns. We believe rates currently above 3% may be one solution. Legging back into financial markets, especially if underweight to strategic targets, remains a priority in our guidance as markets finally settle again, as we expect.

For investors who have cash and are seeking investment opportunities, our equity guidance prioritizes quality, and our fixed-income guidance emphasizes selectivity. We expect the U.S. economy will avoid a recession in 2025 and gain momentum in 2026, but near-term policy uncertainty could create increased market volatility, which may push financial market prices sharply higher on one day’s (or month’s) good news but lower on bad news the next.

We continue to expect positive (albeit slowing) economic growth in 2025, and a faster pace through next year. To avoid becoming overly defensive, we prefer quality and selectivity. In fixed income, selectivity favors investment-grade fixed income and focuses on corporate bonds and essential-service municipal securities. In our view, the middle range (3 to 7 years) of maturities offers comparatively better value than longer or shorter maturities.

In equities, quality at the regional and sector level includes strong profit margins, limited balance-sheet leverage, and high earnings stability. During market downturns, we expect these companies to benefit from solid defensive characteristics. We also believe they have the size and earnings potential to outperform (“playing offense”) as economic conditions improve.

At the level of regional equity markets, our view is that quality has a lot to do with less dependence on trade and imported oil. The emerging economies (e.g., China, Brazil, and India) depend more on trade than the developed economies of Europe and Japan, and the developed markets rely more on trade than the U.S. economy does.¹⁴ Meanwhile, in late 2024, the U.S. was on pace to hit a record low in oil imports from the Middle East.¹⁵ So, our quality emphasis favors U.S. Large Cap Equities and U.S. Mid Cap Equities over U.S. Small Cap Equities. Likewise, we favor Developed Market ex-U.S. Equities over Emerging Market Equities. Among the U.S. large-cap sectors, we prefer Information Technology, Communication Services, Financials, Utilities and Energy.

¹ David E Sanger, “Trump Acknowledges Israel Could Attack Iran Soon”, The New York Times, June 12, 2025.

² “Joint Comprehensive Plan of Action”, U.S. Department of State, June 12, 2025.

³ Akhtar Makoii, “Iran risks US fury after increasing uranium stockpile”, U.K. Telegraph, June 1, 2025.

⁴ “Oman foreign minister says there will be 6th round negotiations between Iran and U.S. on Sunday”, AP, June 12, 2025.

⁵ Makoii, op. cit.

⁶ “Iran announces a new nuclear enrichment site after UN watchdog censure”, Associated Press, June 12, 2025.

⁷ Makoii, op. cit.

⁸ Ria Reddy, et al. “Special Report: Israel Strikes Iran”, Institute for the Study of War, June 12, 2025.

⁹ “Iran – country report”, Jane’s, June 2, 2025.

¹⁰ Barak Ravid, “U.S. fears Iran's response to Israeli attack would be mass casualty event", Axios, June 12, 2025.

¹¹ “With Iran and Saudi Arabia, the U.S. Faces a Uranium Enrichment Dilemma, Rane Stratfor, April 28, 2025.

¹² Wells Fargo Investment Institute, “2025 Midyear Outlook: Opportunities amid uneven terrain”, June 10, 2025.

¹³ Keith Laing and Mario Parker, “Trump Floats Higher Auto Tariff, Repeals California Gas-Car Ban”, Bloomberg, June 12, 2025.

¹⁴ According to World Bank data, in 2023 (latest data available) exports made up 50% of the European Union economy, but the U.S. economy counted on exports for only 11%.

¹⁵ Ken Roberts, “2024 US Oil Imports From Middle East Hit New Record Low”, Forbes, August 16, 2024.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication Services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the Communication Services sector may also be affected by rapid technology changes, pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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