Declining market confidence and weakening earnings can lead to temporary drops in equity markets, according to a recent International Monetary Fund paper. The study finds that such events typically result in an average one-month equity market decline of about 1%. Certain geopolitical conflicts also disrupt the supply of essential goods or commodities. When major oil producers are affected by conflict, oil prices often rise due to concerns over production and supply infrastructure.
On October 9, Israel and Hamas agreed to cease hostilities in their two-year war in the Gaza Strip. Both parties are working through the first stage of the agreement, which includes a prisoner and hostage exchange. The future governance of Gaza remains uncertain. The Trump Administration introduced a 20-point peace plan on September 29, which outlines phase one as including the hostage-for-prisoner swap and ceasefire, with Israeli forces withdrawing to an agreed line. The plan also proposes an international supervisory body to oversee a transitional Palestinian technocratic government until it is able to manage Gaza’s day-to-day affairs.
OPEC countries based in the Middle East produce approximately a quarter of the world’s oil supply and export more than two-thirds of their production. Disruptions in this flow affect the global balance between supply and demand. The most extreme historical example is the 1973 OPEC embargo against the U.S. and several European nations, when oil prices quadrupled and the U.S. entered a deep recession.
While healthy economies and strong corporate earnings usually drive capital markets, political events can at times overshadow these fundamentals. “Geopolitical conflicts are always a consideration,” says Terry Sandven, chief equity strategist with U.S. Bank Asset Management Group. “Investors are navigating a lot of moving parts in 2025, including the tax bill, President Trump’s changing tariff policies, and the government shutdown along with ongoing overseas conflicts.”
Stock markets initially declined after Russia invaded Ukraine and Hamas attacked Israel. Sandven points out that higher inflation risk following an increase in oil prices is another factor for markets to consider. “Inflation is kryptonite to stock valuations,” says Sandven. “If energy prices rise and the price of other goods follow, this might force the Federal Reserve to raise interest rates, which could temper corporate earnings.”
There has been global support for the end of hostilities at several flashpoints this year, including between India and Pakistan. However, the conflict between Russia and Ukraine, which began on February 24, 2022, continues. Following Russia’s invasion, oil prices briefly rose above $120 per barrel but have since fallen to less than half that level.
Reduced tensions in the Middle East and steady regional energy supplies have helped ease investor concerns about geopolitical risks. Natural gas prices differ from oil prices as they are set regionally rather than globally. “Interruptions in Middle East natural gas production make European natural gas prices more vulnerable,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. He notes that Europe has decreased its imports of Russian natural gas since the start of the Russia-Ukraine war in 2022 and now depends more on Middle Eastern producers for its supply.
Strong consumer spending and business investment continue to support equity markets as major companies report solid profit growth. While geopolitical events introduce new risks, they have not yet led to wider conflicts with negative economic consequences.
Current market fundamentals remain positioned for continued growth in the near term. Investors are encouraged to consult with their wealth planning professionals about how current economic changes align with their objectives and risk tolerance.
