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Market Reflections: Markets React to Middle East Conflict
TD Wealth Chief Investment Office
March 2nd, 2026
History often arrives unannounced. While rising tensions around Iranian nuclear ambitions led to a military buildup in the Middle East, the focus this year seemed to be on a political rather than military resolution.
All that changed over the weekend with joint military action from the U.S. and Israel targeting government, military and intelligence installations across Iran. Retaliation from Iran was swift and broad-based, bringing the region back to the brink of conflict.
At time of writing, combat operations across the region are continuing. The Trump administration has said operations may continue for a week, or as long as necessary to achieve its objectives. Iranian strikes also continue, but with volume likely to be limited by disruptions to leadership and damage sustained by its military assets.
In this article, we provide some perspective on the recent developments, along with important insights to help investors remain on track with their long-term goals and objectives.
Energy Markets in Focus
Energy markets are one area which have been quick to respond to heightened regional tensions. Oil exports from Iran account for only about 2% of global supply, with most of it destined for China. More important to the energy market is the ease of movement in the Strait of Hormuz, a narrow waterway which separates Iran from neighboring gulf states. It is estimated that about 30% of the world's seaborne oil supplies passed through this strait last year alone. Any act of escalation which targets this shipping route could have ramifications on geopolitical tensions and energy markets.
International oil prices increased sharply during the first two months of 2026, largely on geopolitical strains, but stayed below the level reached at the peak of the most recent Middle East conflict, the 12-day war against Iran in June of last year. On Sunday evening, the futures market opened higher by more than 8% and revisited the peak of almost $80 per barrel from 2025, before easing again.
The duration of any disruptions or discouraged flows in the Strait of Hormuz will be key in determining how high and how long crude oil prices can stay elevated. With no damage, most of the risk premium now embedded in oil prices are likely to evaporate in the weeks after hostilities end.
While oil may represent a key means of transmitting Middle East conflict to global financial markets, it's important to remember that the broader economic impact of such a price shock today is much lower than in preceding decades. According to FactSet, for example, it took 2.8 barrels of oil per day to generate $1 million of U.S. GDP back in 1975. By 2023, this figure had declined by 70% due primarily to rising industrial efficiency, faster growth of the less energy intensive service sector and the rise of renewable energy.
The U.S. remains the largest single oil producer globally, representing around 20% of total output. Although oil prices remain subject to global supply and demand factors, the self-sufficiency of U.S. production further limits the domestic impact of energy supply shocks and uncertainty in the Middle East.
Conflict and Financial Markets
Historically, market reactions to military conflict have often been short and quickly reversed, so the probability of a more severe and protracted scenario currently remains low. As an example, the Iraq War, which began in March of 2003, initially weighed on performance of the S&P 500 Index of large-cap U.S. equities, but short-term uncertainty gave way to longer term gains, with double-digit returns in the 12-month period that followed ultimately rewarding patient investors.
From a financial market perspective, the Iraq war was not a unique period. Looking back over the last 50 years, be it the Iran-Iraq war in the 1980s, war in Afghanistan in the 2000s, or even more recently with the Russian invasion of Ukraine in 2022, the pattern of how markets respond has remained consistent.
The outbreak of conflict understandably creates a period of heightened anxiety as headlines stir emotions and tempt investors to become more cautious. Frequently, this has led to shorter-term pullbacks in financial markets over the weeks and months following the onset of conflict, before longer-term perspective prevailed with a renewed focus on the fundamental drivers of growth.
Market Resilience
At the height of geopolitical or market uncertainty, individuals may be tempted to make investment decisions that put their long-term financial goals at risk. In such periods it is important to keep volatility in perspective.
Periods of heightened market volatility have often been followed by strong recoveries. While moving to cash during a market downturn may help to ease short-term anxiety, it can also result in missing out on the subsequent bounce-back in performance, as shown below. While the drivers and time periods may differ, history has shown that economies and financial markets are often more resilient than expected.
Growth of $100,000 in the S&P 500
(Red lines represent investment growth following an exit to cash)
For Illustrative Purposes Only
Source: Morningstar, TD Wealth Chief Investment Office. Data as of January 1, 2018 – December 31, 2025. Cash represented by FTSE Treasury Bill 3-month USD. Past performance is not indicative of future results. The indices are a tool to compare the performance of one or more indices. The volatility and performance of the indices may be greater than or less than the volatility and performance of actual investments. Indices reflect the reinvestment of dividends and income. Indices do not have fees, expenses or taxes, which would lower performance. Indices are unmanaged and not available for direct investment.
Markets May Be Quick to React, but Investors Don’t Need to Be
We've already seen periods of volatility in the markets so far in 2026, but often the biggest threat to investing success is not the source of uncertainty but how investors respond.
Conflict in the Middle East and heightened geopolitical tensions are likely to create continued headline risk and periods of volatility. Markets may be quick to react, but investors don’t need to be. The chart below shows the value of $100,000 over 30 years for an investor fully invested in the S&P 500 Index during that period, compared to investors who had missed the 5, 10 or 20 highest returning days. Oftentimes, strong up days for equities follow substantial down days.
Historically, investors who have focused on a long-term plan have achieved greater outcomes by not missing those days.
Growth of $100,000 (30 Years)
For Illustrative Purposes Only
Source: FactSet, TD Wealth Chief Investment Office as of December 31, 2025.Past performance is not indicative of future results. The indices are a tool to compare the performance of one or more indices. The volatility and performance of the indices may be greater than or less than the volatility and performance of actual investments. Indices reflect the reinvestment of dividends and income. Indices do not have fees, expenses or taxes, which would lower performance. Indices are unmanaged and not available for direct investment.
Final Thoughts
TD Wealth continues to take a risk-managed, high-quality approach to investing. While the type of military conflict and geopolitical tensions we've seen recently can create a significant amount of uncertainty, it is important for investors to continue focusing on their long-term investment plan.
Periods of heightened volatility can also serve as an important reminder of the benefits of a diversified portfolio. Maintaining thoughtful and well-balanced exposures to a wide range of asset classes, sectors and geographical regions can provide investors with the opportunity to benefit from multiple drivers of return, regardless of the market environment. It is our belief that this approach will continue to serve investors well in helping to ultimately achieve their longer-term financial goals and objectives.