Should there be de-escalation in Iran, is the shock entirely reversible? - March 24, 2026

A rapid de-escalation in Iran, driven by the US administration, would ease stagflation fears and reduce risk premiums. However, this crisis has already produced a major shift from the early-year consensus: Wall Street's resilience versus the vulnerability of Europe and Asia. Should we bet on a reversal of the market shock or, conversely, on a change in leadership more favourable to US assets?

The stagflationary shock linked to the war in Iran caught investors by surprise. Since late October 2025, Wall Street had been paralysed by uncertainties surrounding the distribution of AI winners and losers, while Europe and Asia benefited from expectations of a global economic recovery. These trends were reinforced by an older narrative dating back to "Liberation Day", 2 April 2025, when the world became wary of America and the dollar. But since the beginning of the conflict with Iran, Wall Street has been the most resilient, while European and Asian markets corrected sharply (Figure 1).

Europe and Asia – highly dependent on fossil fuels – have indeed been very exposed by this crisis. Conversely, America benefits from superior energy autonomy. The rise in crude oil prices certainly impacts the US economy, but it experiences no shock from locally produced and distributed natural gas. Moreover, the AI investment boom suddenly appeared as an economic support and a less risky stock market theme, as it was relatively isolated from the oil shock. Finally, fears for the US economy were limited by a more expansionary fiscal policy than in Europe and Japan in 2026. Of course, the problem of a sluggish labour market remains a risk factor, as do private credit woes. But this also reduces the risk of the Fed rushing to raise interest rates in the face of the foreseeable rise in inflation in the coming months.

In a scenario of de-escalation of the conflict in Iran, will the narrative once again shift in favour of the markets and sectors most exposed to the energy shock, and to the same extent as during the escalation phase? The reversibility of the shock will depend on geopolitical factors (rapid counter-shock or persistent tensions), economic, psychological, and valuation factors.

On the economic front, an interesting debate opposes the majority, who believe the key lies in the duration of the conflict, and those who think the damage is done because the magnitude of the energy price increase has already induced a lasting change. A recent study published by the Dallas Fed estimates that one or even two quarters of a 20% drop in global crude oil supply, followed by a rapid return to normal, would have only a minimal effect on global growth by the end of the year (-0.2% to -0.3%). At the other end of the spectrum, economist James Hamilton's work suggests that a sharp rise has a lasting impact if that rise sends the barrel price above its recent maximum. The shock would quickly induce behavioural changes linked to purchasing power losses and sectoral disruptions. Conversely, a fall in barrel prices would have little rapid positive impact.

James Hamilton proposes comparing the barrel price to its maximum over the last 12 months. We propose another version that takes into account the oil price volatility regime. The impact of a sharp rise is indeed probably smaller when economic agents have been accustomed to significant variations, which has been the case over the last two decades. At $100 per barrel of WTI crude, it is slightly above the normal fluctuation band of the last five years (Figure 2). Is this enough to cause the lasting negative effect predicted by Hamilton? It is difficult to say, but it is possible that investors may prefer to "wait and see" and partly protect themselves from this risk.

If this is the case, they may wish to continue favouring the US market while waiting for more information, with Europe and Asia being ostensibly more vulnerable. In Europe's case, this risk is exacerbated by expectations of ECB rate hikes, which are unlikely to disappear completely.

However, valuation issues still need to be considered. In some markets, including European banks, the correction in valuations has indeed been substantial. The forward P/E of the Eurozone bank index had gradually climbed from 6.5x in 2023 to 11x in January 2026, before falling back to around 9x in recent days (Figure 3). Its relative P/E to the market has also corrected significantly, and the dividend yield has once again reached 6%, a rate to which the effect of share buybacks must be added. Barring a return to a very negative scenario in Iran, the value proposition therefore seems attractive.

Given these observations and following announcements from the US administration opening negotiations with Iran, we have increased equity exposure rates in our Global Macro funds, proportionally to the characteristics of each fund. On theme allocation, we are following a middle path between the currently renewed appeal of the US market and catch-up opportunities elsewhere. In global funds, we have invested in both the US market (S&P 500) and Eurozone banks (Euro Stoxx Banks). These investments are in index futures contracts to maintain responsiveness in the event of a new scenario change.