The War Is Lasting Longer. Market Implications to Watch.

Highlights

• Markets initially treated Iran as another short, contained flare-up lasting days or weeks. That view may be fading.
• The timeline may potentially extend through the summer, which could materially change the market backdrop.
• If elevated oil prices persist into summer, the risk may shift from a temporary sentiment shock to a more sustained squeeze on consumers, delayed Fed easing, and prompting higher long-end yields.
• Energy has historically been viewed as a potential leadership group in similar environments, with refiners often benefiting.
• Airlines, autos, and mid-market consumer discretionary names may be more exposed in a higher fuel cost environment.

The Potentially Bigger Market Backdrop

Before the conflict, our base case was already for a market that could trade sideways with wide top-to-bottom swings.

Two opposing forces have remained in place:

• Excess liquidity has tended to support pullbacks and risk appetite.
• Rich valuations and macro headwinds may limit sustained upside.

These forces can create a market where rallies struggle to hold, selloffs attract buyers, and leadership rotates quickly.

The Iran conflict does not replace that framework. Instead, it may intensify it by adding inflation pressure, narrowing the Fed’s flexibility, and accelerating rotation toward energy while exposing consumer cyclicals.

This Is No Longer a Flare-Up

When the conflict began, markets largely assumed the familiar template: a sharp geopolitical shock, a spike in oil, a few volatile sessions, then gradual normalization.

That assumption may now be evolving.

The conflict is now entering its third month, with limited visibility to an end. It has not been especially kinetic in the conventional sense, but that matters less to markets when the economic choke point remains impaired. The Strait of Hormuz has experienced constraints, energy flows have been disrupted, and a clearly visible diplomatic or military path to resolution has not emerged to date.

The timeline tells the story:

• Feb. 28 — Coordinated U.S.-Israel strikes on Iran begin.
• Early March — Iranian retaliation follows; disruption to Gulf shipping intensifies.
• Late March / April — Intermittent diplomacy, continued standoff, no durable breakthrough.
• Now — Entering the third month, with the conflict running toward peak summer demand season.

What began as a temporary shock may be developing into a more sustained macro condition.

The early playbook was tactical: buy the dip, fade oil, expect easier policy later.

The current environment may place greater emphasis on duration, earnings revisions, and sector performance.

Why Summer Matters

As the conflict extends and overlaps with the U.S. driving season, the consequences may increasingly move from geopolitical headlines into company earnings calls and Wall Street estimates.

Between Memorial Day and Labor Day, the U.S. typically sees its strongest gasoline demand of the year, with the driving season representing approximately 35% of annual motor gasoline consumption.

For households, timing matters. The average U.S. family uses roughly 90 to 110 gallons of gasoline per month, and summer driving often pushes that higher.

That means every $1 per gallon increase could raise costs by approximately $90 to $110 more per month, or $300+ over a summer season.

That money may come from the same bucket allocated to:

• restaurants
• apparel
• leisure travel
• children’s activities
• home goods
• savings

When multiplied across millions of households, that can become an earnings consideration.

The Fed Complication

The Federal Reserve is also entering a leadership transition.

Jerome Powell has confirmed he will step down as Fed Chair when his term ends May 15 but will uniquely remain on the Board of Governors to protect the institution's independence. Meanwhile, the Senate Banking Committee has voted to support Kevin Warsh as the next Fed chair.

Markets had expected an easier policy path. As recently as early March, futures markets broadly priced two to three 25 bp cuts in 2026. Today, expectations have shifted, with fewer cuts priced in.

Why? One reason is that higher oil can contribute to Consumer Price Index (CPI) and, more importantly, Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred measure.

There is another layer equity investors often miss.

Many investors treat Fed cuts as synonymous with lower rates everywhere. In reality, the Fed exerts its strongest influence over the front end of the curve. The bond market has greater control over 10-year and 30-year yields.

So even if the Fed cuts short-term rates, markets may offset that by demanding a higher term premium on long-term Treasuries.

That matters because long-term yields influence:

• mortgage rates
• auto loans
• corporate borrowing costs
• equity valuation multiples

A Fed cut does not necessarily guarantee easier financial conditions if the long bond moves in the opposite direction.

Sector Observations

(i) Energy

a. Refiners

If crude supply stays constrained while gasoline, diesel, and jet fuel markets tighten, refiners may see margins expand. In past oil shocks, refiners have at times been among the faster earnings responders relative to producers.

b. Integrated Energy

Broad upstream and diversified energy businesses may benefit from higher commodity prices, stronger free cash flow, and improved capital return flexibility.

c. Pipelines / Midstream

Steadier fee-based cash flows and income profiles can at times be more resilient during periods of volatility.

(ii) Airlines — Especially Low-Cost Leisure Names

Fuel costs may rise just as price-sensitive travelers may begin to reconsider discretionary trips. Budget-focused carriers may be more sensitive causing both demand and margins to come under pressure.

(iii) Autos

Higher gasoline prices and higher financing costs can create headwinds. Consumers may delay buying a car far more easily than they can delay filling the tank.

(iv) Mid-Market Consumer Discretionary

The pressure often lands below luxury and above staples — the middle of the wallet:

• apparel chains
• casual dining
• family entertainment
• sporting goods
• home furnishings
• general merchandise

What to Watch Now

1. National gasoline prices into Memorial Day

2. Refining margins / crack spreads

3. Airline summer booking commentary

4. Auto financing trends

5. CPI / Personal Consumption Expenditure (PCE) prints

6. 10Y and 30Y Treasury yield behavior

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