Institute Alert

• The Iran War last week delivered some surprises, but we still see the path developing for a war of weeks, not several months, as we wrote in our March 2 report, “New fighting in the Middle East and market impact”.
• The sequence of escalations by both sides has developed as we have been expecting, albeit at a faster pace that suggests both sides are facing growing constraints that may prevent a long conflict.

• Market movements continue to support energy equities and commodities, the U.S. dollar over gold, and U.S. Large Cap Equities over international markets. Fixed income returns have fallen on inflation concerns.
• The main risk is a longer engagement that damages the global economy and undermines financial markets. Effective hedging may remain challenging and expensive. We favor rebalancing in a diversified portfolio.

Throughout the week: Israel and the U.S. further reduced Iran’s missile and drone resources. Israel continued to push Hezbollah (a proxy army of Iran) out of southern Lebanon. Reports of Iranian attacks on the Gulf states continued.

March 7-8: Sharp political divisions emerged among Iran’s leaders about how to run the war.¹

March 9: Global equity and commodity markets opened volatile after a weekend of limited access to the Strait of Hormuz. Later in the day, the Group of Seven (G7) countries promised to take measures to support oil markets.²

March 10: The USS George H.W. Bush carrier strike group was reported heading to the Mediterranean Sea.³

March 11: Iran attacked multiple commercial vessels in the Persian Gulf and near the Strait of Hormuz.⁴ The International Energy Agency (IEA) announced a planned release by its 32-country membership of 400 million barrels of oil over the coming months, including 172 million from the U.S. Strategic Petroleum Reserve.⁵

March 12: Computer hackers supporting Iran claimed responsibility for a cyberattack on a U.S. medical device company. Hackers also have targeted industrial facilities, an airport, and a school in the Gulf countries. The attacks have destroyed internal data or helped Iran target its projectiles.⁶

March 13: The Pentagon approved a request from military commanders in the Middle East to send the 31st Marine Expeditionary Unit (roughly 2,500 Marines) to the region from Japan, arriving the coming week.⁷

March 13-14: The U.S. attacked Kharg Island, the main point where Iran loads oil onto tankers.⁸

A sharp — if not sustained — rise in oil prices is driving market movements. U.S. West Texas Intermediate oil futures and options markets are pricing in a peak by May. Global equity prices slid, but the S&P 500 Index has outperformed international equity benchmarks. Higher energy prices likely raise inflation globally but should weaken the major international economies faster and deeper than the U.S. economy, a significant energy exporter.

War can attract investors into fixed income as perceived safe havens to bridge over the hostilities, but not this time. The main impact of the oil price surge is to raise inflationary pressures and yields across maturities. Expectations for central bank rate cuts (U.S.) are dimming and prospects for European rate hikes are rising.

The price of gold weakened, underperforming the U.S. dollar, whose composite index of exchange rates against six major currencies gained 3%.⁹ Gold also underperformed the U.S. 10-year Treasury note and the S&P 500 Index. Gold has several disadvantages versus the dollar in this oil-price driven war. The European and Asian economies are net importers of oil, but the U.S. exports energy. Also, oil is denominated in dollars, so a higher price increases the demand for dollars needed to buy energy. Rising U.S. yields also weigh on gold. Finally, selling gold can produce cash to cover sometimes significant daily equity losses from mid-January.

Looking ahead, the war’s market impacts likely depend on two related factors, escalation and constraints, that both sides seem to be managing. So far, the events of the past two weeks show the sequence but not the pace of escalations we were expecting in our March 2 report. Iran has attacked U.S. regional bases and Israel but jumped more quickly than we had expected to attacking Iran’s Gulf neighbors. We also have been expecting heavier bombardment with B-52 bombers but not U.S. troops on the ground.

The cyber threat we have been expecting also arrived last week. Hackers siding with Iran broke into the computer system of a U.S. medical device firm and into various private businesses in the Gulf states. Iran and its proxies may attempt further hacking, but U.S. and Israeli attacks may increasingly limit their resources.

Our March 2 report names a complete shutdown of the Strait of Hormuz as the highest stage of Iranian escalation, and that remains our thinking. This escalation includes attempts to destroy the Gulf states’ oil production and pumping facilities. We think it notable that both sides have avoided closing the Strait and a coordinated destruction of the region’s oil infrastructure.

That pattern was visible again in last week’s events. The U.S. bombed Iran’s Kharg Island oil pumping station but hit only military targets, leaving the oil pumps alone. Even with roughly 15 Iranian attacks on commercial vessels so far, this is a small fraction of the approximately 3,000 vessels parked outside the Strait and in the Gulf of Oman.¹⁰ The Strait remains open and we are not seeing a systematic campaign against commercial traffic.

It is not clear yet how the additional U.S. Marines may be used, but it bears remembering that the U.S. wants to remove the regime. Destroying the regime’s ability to project power beyond Iran’s borders is one tactic, but suffocating the economy could be another. Those Marines might try to take Kharg Island and stop Iran’s ability to pump oil. That could escalate Iranian activity to close the Strait or attack oil infrastructure in the region.

A second consideration for the war’s duration is how quickly each side’s constraints finally bind enough to discourage further fighting. We see the same constraints that we observed in our March 2 report. Iran’s main limitation is the pace of losing ballistic missile and drone weapons. Independent Israeli and western sources estimate that the U.S. and Israel have destroyed between 60%-66% of Iran’s mobile ballistic launchers, so far, but the total did not materially increase last week.¹¹ Perhaps to avoid revealing the locations of its remaining mobile launchers, Iran may be conserving its ballistic missiles. For now, Iran is relying comparatively more on its less sophisticated cruise missiles that are low-cost but more easily shot down than ballistic missiles.¹²

From the U.S. side, adding the Bush carrier strike group addresses several U.S. constraints. One is the limit of seaborne firepower in a mountainous country twice the size of Texas. The Bush group adds squadrons of primarily F/A-18E/F Super Hornet fighters, for precision ground attacks and ground defense suppression.¹³ The three carrier groups spread across the Mediterranean, the Red Sea and the Arabian Sea add firepower and thin out Iran’s defenses. The third carrier also deepens the U.S. arsenal and allows one of the carrier groups to pause operations on station for occasional repairs and rest, while the other two still attack from different directions.

Political constraints appear to be building. One of the interesting events last week was the public friction among Iranian government officials. Those internal divisions are likely to build as Iran’s military force projection fades. Meanwhile, the Trump administration’s statements have at times suggested that the war is already won, while at other times that work remains to be done.¹⁴ The contrast suggests to us some time pressure.

Escalation can intensify the constraints. As both sides expend or lose weapons, or if Iran loses its Kharg Island oil revenue, we could see Iran escalate with more ballistic missiles, try to physically close the Strait or, more likely, directly attack oil production across the region. The U.S. might then put more troops on the ground, in addition to the air attack. In our view, if one escalation prompts another, the political pressure for either side (especially the U.S.) could intensify and force a withdrawal, even if this brings longer-term risks of its own.¹⁵

If escalations increase the pressure from constraints, the scope of the war may come down to weeks, not exceeding several months. We note from options markets in West Texas Intermediate crude oil futures that the demand for call options (i.e., options to buy at a particular price) show interest in the hundreds and thousands of contracts at possible prices (called strike prices) of $98 in May, $95 in June and $90 in July.¹⁶ We also note that those option prices need not imply a war that lasts until mid-summer. The war could end in May, even if it takes producers some additional weeks to restart production. Options markets are expecting a severe conflict, but not a long one.

The main risk we see to our outlook is that markets still appear very unsettled. On March 9, the oil market opened to the news that commercial vessels largely were refusing to cross the Strait. That was enough to send the global benchmark Brent crude oil futures contract for delivery in April up to $103/barrel at the open of trading and as high as $110 intraday, before settling near $94, once the G7 promised to support global oil supplies. The options markets also mirror this volatility with extreme sensitivity to oil prices and to overall oil market volatility. In short, markets are paying close attention to events that may extend the war beyond May.

One can try to hedge particular risks, but the challenge is that the hedge may be the wrong one or very expensive. Gold may not be a good hedge for a war that affects markets through oil prices and inflation. Alternatively, one could buy call options on oil, but investor sentiment has settled on a few price levels and the large volume of calls at prices between $98-$100 per barrel between May and June may make the option route expensive. After the shooting stops, any hint of lingering geopolitical stress in the region may leave oil in the $75-$85 per barrel range.

We prefer what we believe will be a less costly and more comprehensive approach to risk. For context, when we think back on the past 25 years, the events that were unexpected and negative for economies and markets include a wide range from the 9/11 attacks, to the Great Financial Crisis of 2008, to COVID, to two wars in this decade. Rather than try to predict what may come next, we prefer to maintain a diversified portfolio.

This approach doesn’t attempt to guess the next shock but historically has benefited from some form of maintenance rebalancing. This basic process involves selling assets whose prices appear to have outrun their fundamentals and reallocating the proceeds to cheaper looking assets whose fundamentals look solid. Our tactical guidance has employed this approach several times since 2023 around the ups and downs in technology-related sectors.

Our base case foresees a limited if intense war in Iran. Oil equities and oil prices have run up, but we expect the price surge to reverse and for excess supply to drive global oil prices lower. More attractive sectors in our guidance include Utilities, Industrials and Financials. At a higher level, we would add to equities before fixed income and within equities, favor U.S. Large- and Mid-Cap Equities over U.S. Small Cap Equities and international markets.

¹ Ria Reddy, et al. “Iran Update Evening Special Report”, Critical Threat Project, March 7, 2026.

² “G7 to take necessary measures to support energy supplies”, British Broadcasting Company, March 9, 2026. The G7 is an informal forum of the leaders of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

³ “US Navy prepares third carrier strike group deployment with USS George H.W. Bush near Iran”, Army Recognition, March 10, 2026.

⁴ Mohammed Omar, “Iran War Traps 3,000 ships and 20,000 sailors in the Persian Gulf”, Houseofsaud.com, March 14, 2026.

⁵ U.S. Will Release 172 Million Barrels of Oil From the Strategic Petroleum Reserve, Institute for Energy Research, March 10, 2026.

⁶ David Klepper, “Iran-linked hackers take aim at U.S. and other targets, raising risk of cyberattacks during war”, PBS, March 12, 2026.

⁷ Lara Seligman and Shelby Holliday, “More Marines and Warships Head to Middle East as Hormuz Mission Intensifies”, The Wall Street Journal, March 13, 2026.

⁸ “Iran update special report”, Institute for the Study of War, March 14, 2026.

⁹ The ICE U.S. Dollar Index is a weighted average of the value of the U.S. dollar relative to a basket of U.S. trade partner currencies, composed of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc.

¹⁰ Mohammed Omar, “Iran War Traps 3,000 ships and 20,000 sailors in the Persian Gulf”, Houseofsaud.com, March 14, 2026.

¹¹ Gerry Doyle, “Iran Missile Launcher Arsenal Holds Steady Despite Strikes”, Bloomberg, March 12, 2026.

¹² Ibid.

¹³ “FA-18 super hornet and EA-18 Growler”, Boeing, March 14, 2026.

¹⁴ Amanda Terkel, “’Already won’ or ‘got to finish the job’ - the Trump administration's mixed messages on Iran, NBC, March 13, 2026.

¹⁵ It’s possible that a wounded but surviving regime in Tehran in the coming months ore years could prepare a revenge strike on the U.S. before the U.S. is ready to counter it, for example.

¹⁶ Demand is paltry for put options (i.e., options to sell, popular if prices are expected to fall sharply), nearly zero across those three months.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns and does not guarantee profit or protect against loss in declining markets.

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