It’s not just Iran
The war in Iran continues to be the most visible factor driving global equity market returns. For example, the MSCI equity index for oil exporter Norway has gained over 6% since 27 February, while Thailand, an oil importer, has seen its market fall by nearly the same amount.
In contrast to the (mistaken) investor assumption that markets would react to an attack on Iran in a manner similar to how they did after the 12-day war last year, equity markets have instead moved more like they did following the outbreak of the Gulf War in 1990.
This is a worrisome parallel insofar as global equities ultimately declined by 18% over the two months following the start of that conflict before bottoming out. Oil prices rose by 85% over the same period.
The reason for the extended decline in 1990 was that it coincided with a US recession, which was itself partly triggered by the oil shock. In addition, policy rates were high (the fed funds rate was at 8%) and the savings and loan crisis had triggered a credit crunch. Today, the US economy is in a far better position, even if the most recent revision to fourth quarter GDP data shows growth has slowed sharply from the previous two quarters.
While returns from the oil-sensitive parts of the US equity market (as measured by the Dow Jones US Industrials Index) have been similar to those in 1990, the technology sector has performed much better, contributing to superior returns for the S&P 500 (see Exhibit 1). It is worth nothing that the decrease in equity markets in 1990 mirrored the increase in oil prices. If we see a stabilisation in oil prices today around $100 per barrel, equity markets may also stabilise.
This dynamic points to a key factor in recent market returns that may have been missed given headlines focusing on the daily swings in oil prices and the consequent moves in equity markets.
A major factor driving recent equity returns has been the unwinding of extended long and short positions that had built up during February, many of them related to the volatility in artificial intelligence-linked sectors (see Exhibit 1).
For example, the industry contributing the most to the 4.2% decline in the MSCI All Country World Index (in local currency terms since 27 February 2026) has been financials, driven at least partly by ongoing worries about private credit. The fall in capital goods reflects higher oil prices and worries about global growth, but not the drop in technology hardware and semiconductor stocks, which had gained significantly in February.
The negative figure for metals and mining mirrors the drop in gold and silver prices (also previously big winners). On the plus side of the ledger, energy stocks have naturally done well, but the gain in software stocks is another example of the reversal in February’s sector returns.
The implications of this for investors are twofold. One should potentially have a list of allocations linked to oil prices to make once the Iran war ends, anticipating a reversal of the winners and losers to that point.
But equally, one also needs to maintain a view on AI-related sectors and evaluate their attractiveness based on the earnings outlook and valuations at that time, with the advantage that positioning by then should hopefully be less extreme with market prices therefore less susceptible to big swings.
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