It’s been only two weeks since Iran began to appear as a primary theme in news headlines again, and we’ve gone from protests to international escalation of force, and now to a new appointment of the Supreme Leader of Iran. What seemed to start as just another news cycle featuring the same thing in Iran has now shifted to something that hasn’t happened since the 1980s: changing of leadership in Iran. Though this change doesn’t seem likely to change the posture of Iran internationally, at least at this point. This undoubtedly has already affected the global and US markets, though further ripples through the market will depend on how long this tension lasts internationally.
We’ve seen the cost of crude oil rise dramatically to low $90s, far exceeding the threshold of “overbought” since it broke out of its normal cyclical trends in late February. Crude now approaches levels not seen in nearly four years. Historically, prices do not tend to stay elevated at or above the $100 for crude very long, though it’s certainly possible, like we saw during the Arab Spring (2011-2014) and the Great Financial Crisis (2008).
This will likely result in varying inflation globally, as the global markets rely heavily on energy. An increase in energy prices will affect businesses and consumers broadly, reflecting in the cost of producing, delivering goods/services, transportation, and imports/exports. While inflation numbers tend to lag a bit, and they currently are trending low, it remains to be seen what either Bureau of Labor and Statistics data will show on the upcoming report (3/11/26) – though that will only include data from February. Alternative inflation tracking, like Truflation, reports inflation rates at significantly lower numbers (1% YoY) than BLS (2.4% YoY), though we believe it’s too early to read the data “tea leaves” just yet.
The stock market has had plenty to say about this global event with Iran, however, We’ve seen the three major indices (S&P 500, Dow, Nasdaq, Russell 2000) all pull back over the last two weeks, with all of them down 3-4%+ since the end of February, with small-cap stocks (Russell 2000) seeing the worst of it. We see extra downside with small-caps due to more price sensitivity during periods like this, as costs to do business and borrow money becomes more costly with increased energy prices.
Investors’ dollars seem to be moving away from more growth- and interest rate- sensitive stock sectors (like technology) and moving into more resilient and defensive sectors (energy, industrials, materials, utilities and consumer staples). Should the tension with Iran endure, it would be no surprise to see a continued selloff broadly, though we expect those defensive sectors to continue to see inflows for at least the short-term.
We’ve watched Vanguard’s Energy ETF (VDE) and SPDR Energy ETF (XLE) as helpful proxies to view the rise/decline of the sector’s favorability amongst investors – as both have made long strides upwards over the last 30-60 days. Energy doesn’t often travel outside of its smaller ranges often, though it has shown the ability to provide consistent growth for 1-2+ years at times. We’d consider a deescalation with/by Iran to likely be a sign that this rise in energy stocks is waning. Inside the energy sector, we see small-caps (PSCE as proxy, +3.3%) slightly outpacing large-caps (XLE, +3%) since the end of February, though not by a significant margin.
Industrials (VIS or XLI) includes your defense and aerospace stocks, and we see this as an area to consider as viable for investment opportunity. Though a deescalation might also calm the hype on industrials as a sector, this sector could endure longer simply due to the unknown strategic future of Iran’s new leader. Globally, there is a lot of activity in the defense and aerospace from lingering and blossoming conflicts. Both of these sector proxies for industrials provide good vantage into this space. Inside industrials, small-caps (PSCI, -9%) significantly lagged behind large-caps (XLI, -4%) in performance over the last two weeks.
The other three sectors that are seeing some gains currently, mentioned above, also have some variance between large- and small-cap constituent performances:
- Materials: large-caps outperforming small-caps by 2-5%
- Utilities: large-caps outperforming small-caps by 1-3%
- Consumer Staples: large-caps outperforming small-caps by 1-3%
March 2026 is a prime example of how the market may appear to simply be up or down at times, though screening through the outer layer can provide a clearer view of the state of the market. The strength of the market is shifting towards historically-defensive areas, as a result of the Iran conflict and its effect globally, and the market has underlined the shift from small-cap outperformance to large-caps, after small-caps come through with a strong 12-month return.
