Israel-Iran Conflict: Stocks Face Another Geopolitical Test

Stocks fell broadly on Friday following Israel’s airstrikes on Iran’s nuclear facilities and military leadership. Over the weekend, the two countries exchanged missile fire, with Israel decimating Iran’s air defense systems and several Iranian missiles landing in Israeli residential areas.  

Israel’s mission is reportedly expected to take several weeks. The main short-term objective is to neutralize the Iranian nuclear threat. Longer term, the more difficult goal is to effect regime change, though it is not clear whether that will be achievable. The U.S. and other allies are helping Israel shoot down Iranian missiles, but it is not clear how much more help Israel may get. 

How Geopolitical Events Have Affected Stocks Historically 

With that as a setup, before we get too far outside our lane as market strategists, let’s turn to how this conflict may affect markets. Every conflict is of course different, but reviewing a list of 25 geopolitical shocks (wars, other military conflicts, terror attacks, etc.) reveals that stocks have historically been quite resilient in the face of these shocks. 

The accompanying table lists 25 of these geopolitical events, dating back as far as Pearl Harbor in 1941 and the Korean War in 1950. The day-one loss of about 1% on Friday, June 13, is very close to the average market reaction to these events, with an average S&P 500 decline of 1.1% and a median drop of 0.4%.  

Total drawdowns around these events have been fairly limited as well, averaging 4.6% (median 2.9%) over an average of about 19 days (median 8 days). Recoveries to pre-event levels have taken longer, averaging 40 days (median 18), but we’re still talking about an interruption of only a few weeks to a couple of months typically. 

Stocks Have Historically Been Resilient Following Geopolitical Shocks 

S&P 500 Index and Select Geopolitical Events 

Source: LPL Research, Bloomberg, Factset, S&P Dow Jones Indices, CFRA, Strategas 06/13/25 
All indexes are unmanaged and cannot be invested into directly.  Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90. 

There have been exceptions to the resilience, including Pearl Harbor and Iraq’s invasion of Kuwait, during which stocks suffered double-digit drawdowns and took quite a while to recover. Specifically, the S&P 500 (and its predecessor S&P 90 Index) took more than 450 days (about 15 months) to recover from the losses after the U.S. entered World War II, and 260 days (nearly nine months) to recover losses from the First Gulf War. 

The negative market reaction to the First Gulf War, which included a nearly 17% drawdown, was exacerbated by economic weakness caused by surging oil prices and the savings and loan crisis. The negative reaction to 9/11, which included an 11.6% drawdown, was also exacerbated by economic weakness following the bursting of the tech bubble the year before. The key takeaway here is that in most cases the economic environment matters more than geopolitics. 

Beyond the Initial Shock 

In the accompanying table, we have calculated S&P 500 performance three, six, and 12 months after these events occurred to get a sense of how they influenced market direction after the events moved to the background. While average returns over three (+2.3%), six (+5.5%), and 12 (+7.8%) months aren’t anything special, they are at least close to historical averages and suggest these events investment strategy. Median returns are even better, with gains of 3.5%, 6.7%, and 11.4% over these three time periods. 

Zooming in on the events that were followed by stock market corrections, including the Yom Kippur War in the Middle East in 1973, the Reagan shooting in 1981, and 9/11, we again notice that the economic environment was the primary cause of the declines. In 1973, the oil embargo was a geopolitical outcome but also a cause of U.S. recession. The Reagan assassination attempt took place during the middle of a double-dip recession caused by the dramatic rise in interest rates to combat inflation (making Paul Volcker a monetary policy idol). And 9/11 exacerbated the economic weakness but the 2001 “dotcom” recession and 2002 Enron and WorldCom accounting scandals were the primary causes of stock market weakness during that time. 

Conclusion

This history should be reassuring to those who may be understandably nervous about the latest events in the Middle East. Iran is a large exporter of crude oil, particularly to China, so destruction of its oil production facilities can have a major effect on global prices. That was evident Friday with Brent Crude jumping 7.6% on the news of the initial airstrikes.  

There are several key questions to answer before we know how stocks will handle this geopolitical shock, including how much of Iran’s energy infrastructure will be impaired and for how long, whether Iran’s nuclear capabilities will be completely wiped out, and whether the current regime will remain in power.  

For those surprised that the U.S. stock market is holding up well today (Monday), we would argue it’s a combination of several factors: 1) the likelihood of regime change in Iran and a resulting “peace dividend”, 2) U.S. energy independence, 3) Israel’s interest in limiting the suffering of Iranian civilians (which could mean limited disruption to oil production facilities), and 4) both players have limited resources and an interest in keeping the conflict contained.