Good morning,
The escalations this week in the Middle East have captured headlines and raised important questions from many of our clients. We wanted to reach out regarding recent developments and share important insights from our team at RBC Wealth Management. Below is a brief summary of the RBC Global Insight article attached to this email.
The Situation at a Glance
A significant regional conflict has emerged, marking the largest Middle East crisis since major U.S. military interventions. While these early days remain unpredictable, our investment strategy team at RBC Capital Markets is actively analyzing the impact on global markets. The reassuring part: we have a clear framework for assessing both the risks and the opportunities ahead.
Why Energy Markets Matter Most
One of the main concerns, aside from the conflict itself, is the potential to disrupt global energy supplies. Oil prices currently threaten to reach $100+ per barrel - a meaningful jump from current levels. However, here's the nuance: a brief conflict would likely trigger temporary price spikes that markets would quickly digest. A prolonged conflict, by contrast, presents genuinely serious risks to investment markets and portfolios.
The critical flashpoint is the Strait of Hormuz, through which roughly one-third of the world's seaborne oil and substantial quantities of liquefied natural gas flow daily. Tanker traffic through the strait has already plummeted from 56 vessels on February 27th to just 7 by March 1st. Major insurance companies are suspending war risk coverage effective March 5th and represents a move that will further discourage shipping traffic regardless of actual military activity.
Even if Iran doesn't formally "close" the strait, the country possesses sufficient capability to disrupt shipping. If this disruption persists, the consequences cascade: regional producers like Iraq and Kuwait cannot export their oil and will be forced to shut in production. European natural gas prices could spike dramatically, reminiscent of the energy crisis following Russia's Ukraine invasion.
The Implications for the Markets
This is where it gets important for your investments. RBC reports that there is a 40% inverse correlation between oil prices and the S&P 500 since 2020. This effectively means sustained energy price increases typically pressure stock valuations. More specifically, geopolitical uncertainty historically compresses stock market price-to-earnings multiples. We saw this during Ukraine (2022), the 2025 tariff concerns, and Iraq war preparations (2003).
Current Outlook
A temporary oil price jump might actually benefit energy stocks while barely affecting the broader market. But if energy costs remain elevated for weeks or months, that's when we see meaningful pressure on corporate margins, consumer confidence, and overall market sentiment.
We remain constructively positioned on U.S. equities for 2026. The market was already digesting geopolitical risks before this conflict escalated and noticed through stock market volatility and energy sector outperformance through January and February. This suggests much of the immediate uncertainty is already priced in. RBC is actively monitoring conflict timeline, Straight of Hormuz operations, oil price trajectory and consumer confidence as it relates to household spending.
Maintaining Our Defensive Approach
The prudent approach is to maintain our active strategic positioning and adequate diversification across asset classes. Our defensive posturing with fixed income, quality companies and alternative investments allows our portfolios to weather these events, maintain consistent portfolio income, and look for opportunities created from market dislocation.
If you'd like to discuss how these developments might affect your specific portfolio or discuss your risk tolerance, please know that Tom and I are never too busy to take your call. We can also be made available to speak with any family members or friends who may need reassurance during these times.
We'll continue monitoring developments closely and will proactively communicate any material changes to our outlook.
Best,
Devin