Oil Shock Is Changing Everything — Why Markets Could Fall Further

Quick Answer: The oil shock triggered by the Iran conflict is pushing inflation higher again, which could force central banks to delay rate cuts — or consider hikes. That shift is now putting pressure on global markets across equities, bonds and credit, and raises the risk of further losses if energy prices remain elevated.

Global stocks have already sold off sharply. Oil is trading above $110 a barrel. Asian markets shed between 4% and 6% on Monday. But the sell-off may have been the first reaction — the bigger risk is what comes next.

The initial market move reflected a straightforward read: war, oil up, stocks down. What is now emerging is something more structural and more dangerous. The Iran conflict isn’t just disrupting energy supply. It is dismantling the assumptions that global markets have been built on for the past 18 months — that inflation was under control, that rate cuts were coming, and that the global economy was on a stable if modest growth path.

All three of those assumptions are now in question simultaneously.

The Real Problem: Inflation Is Back

For most of 2025, inflation was the story markets thought they had moved past. Eurozone headline CPI had returned to the ECB’s 2% target. The Fed had delivered three rate cuts. The narrative was settled: the post-pandemic inflation surge was over.

Oil at $110–$115 breaks that narrative in a matter of weeks.

Energy feeds directly into virtually every consumer price. Fuel costs rise first, but transport costs follow, then food prices, then manufactured goods. The transmission is fast and broad. US petrol prices have already risen more than $1 a gallon in a single month. Eurozone inflation, which came in at 1.9% in February — before a single bomb fell on Iran — is now forecast by Nomura to hit 2.5% in March as the energy spike begins to register. That is a 0.6 percentage point upward revision from one month of conflict.

The “inflation is under control” narrative that underpinned two years of market optimism is cracking. As explored in our analysis of how the Iran war became an economic war, the moment stocks and bonds sell off simultaneously — as they did last week — something structural has changed. This is no longer a geopolitical headline risk. It is an inflationary supply shock, and markets have no clean way to price around it.

Why Rate Cuts Are Now in Doubt

Cheap money was the foundation of the post-2024 equity rally — and that foundation is now cracking.

Before the conflict began, traders had priced in at least two Federal Reserve rate cuts in 2026. The ECB, having delivered eight cuts from its 4% peak to 2%, was expected to hold steady or cut once more. The Bank of England and Bank of Japan were on similar dovish trajectories. The entire investment thesis for growth equities, credit spreads and emerging markets rested on the expectation that the rate cycle had peaked and was heading lower.

Oil at $115 makes that impossible to deliver. Central banks cannot cut rates into an inflationary supply shock without risking a re-acceleration of prices that took years to bring down. As covered in our analysis of the ECB’s position ahead of its March decision, eurozone rate hike expectations have already been repriced, with futures markets now pricing one to two 25-basis-point increases through the remainder of 2026 — a scenario that was considered almost inconceivable eight weeks ago.

The 10-year US Treasury yield has jumped from 3.97% before the war to 4.38% last week. “Higher for longer” — the phrase that haunted markets through 2023 and 2024 — is back. And this time it has arrived with no clear end date attached.

What This Means for Markets

The repricing is already underway across asset classes, but it has further to run.

Equities are the most exposed. Growth stocks and technology — which derive the most value from discounted future earnings — are under the sharpest pressure as yields rise. The Nasdaq fell 2% last week. Smaller companies, which are most sensitive to borrowing costs, led the decline. Valuations built on the assumption of falling rates need to be recalibrated in an environment where rates may rise instead.

Bond markets are repricing in parallel. Yields rising across maturities means bond prices falling — a painful combination for the 60/40 portfolio that relies on bonds to offset equity losses. When both move against investors simultaneously, as they have done this week, there is nowhere to hide in a conventional allocation.

The sectoral picture is clearer. Energy stocks are the obvious beneficiary — US shale producers are generating materially higher cash flows at $110 oil with no Gulf exposure. Defence stocks remain elevated. Everything else — tech, consumer discretionary, financials exposed to credit deterioration — is under pressure. The global stock sell-off detailed in our earlier analysis was the opening move. The repricing of rate expectations is the second.

The Bigger Risk: Growth Starts to Crack

If oil stays elevated, this stops being a market story — and becomes an economic one.

Higher energy costs function as a tax on every business and every household simultaneously. Transport costs rise, squeezing margins across manufacturing, retail and logistics. Consumer spending on essentials crowds out discretionary purchases. Corporate investment slows as input cost uncertainty rises.

The IEA’s executive director Fatih Birol, in the starkest warning yet, said the global economy faces “a major, major threat” — and explicitly stated that no country would be immune if the crisis continued. As examined in our analysis of whether the Iran war could trigger a global recession, a prolonged Hormuz disruption could shave 0.5% off eurozone GDP while simultaneously adding 0.6–0.7 percentage points to inflation.

That is the stagflation scenario analysts are now beginning to price. Rising energy costs colliding with slowing economic growth — the one combination that central banks are least equipped to address, because the tools for fighting inflation and the tools for supporting growth point in opposite directions.

What Happens Next

Three scenarios are now in play, and the distance between them is enormous.

In the first, the Strait of Hormuz reopens within weeks — either through a diplomatic agreement or Iranian capitulation under economic pressure. Oil pulls back toward $85–$90. Inflation expectations stabilise. Markets recover much of the lost ground as rate-cut expectations are partially restored. This scenario requires a political outcome that currently has no diplomatic architecture behind it.

In the second, oil stays in the $100–$115 range for months. Central banks hold — or signal hikes. Equity markets grind lower as earnings are revised down and valuation multiples compress. Credit conditions tighten. The global economy slows meaningfully but avoids outright contraction. This is the base case most institutional desks are beginning to model.

In the third, Trump follows through on his ultimatum and strikes Iranian power plants. Tehran retaliates against Gulf energy infrastructure at scale. Hormuz remains closed. Oil moves toward $150. The financial system faces a liquidity shock on top of the inflationary shock — and the sell-off becomes systemic rather than cyclical.

For now, markets are still in the adjustment phase — repricing assumptions without yet pricing catastrophe. But the next move in oil may decide everything. Until there is a credible path to reopening the Strait of Hormuz, every rally is a selling opportunity and every data point is secondary to the one question no economic model can answer: how long does this last?