By Martin Baccardax

U.S. markets were jolted out of their monthslong malaise over the weekend following a series of deadly U.S. strikes on Iran that both killed the nation's supreme leader and triggered a reaction from Tehran that threatened to broaden the conflict into the wider Middle East region.

With three U.S troops confirmed killed in Kuwait, Iran vowing more retaliatory strikes on U.S. targets in the Gulf, Israel trading blows with Tehran-backed Hezbollah in Lebanon, and reports of an attack on Saudi Arabia's Ras Tanura refinery, Wall Street is facing the likelihood of a prolonged and deadly military campaign that will sap risk sentiment and upend economic and market forecasts for the coming months.

With investors already navigating a host of uncertainties tied to U.S. trade policy, disruption from artificial intelligence, and weakness in private credit markets, a surge in oil prices and a scramble for safe-haven assets are the last thing they were looking for heading into the final months of the first quarter.

"Global financial markets, especially 'risky' ones like equities, will probably continue to be buffeted by swings in investors' appetite for risk as the war progresses and off-ramps come in (or out) of view," said Neil Shearing, group chief economist at Capital Economics.

That reality has stoked a massive surge in the Cboe Group's VIX index, Wall Street's benchmark volatility gauge, heading into the first day of trading for March.

The VIX has risen 24% in overnight trading to 23.10, a level that suggests daily swings of 1.44%, or around 100 points, for the S&P 500.

Curiously, however, while the dollar has found solid favor against its global currency peers in the overnight session, U.S. Treasury bonds haven't been acting like traditional safe-haven plays as the conflict spreads.

Benchmark 10-year note yields were modestly lower from Friday levels at 3.966%, while 2-year note yields actually increased 3 basis points amid concerns that a spike in oil prices would spark renewed inflation concerns.

Brent crude futures contracts for May delivery, the global pricing benchmark, surged as much as 13% in overnight trading, the most in four years, and at last check were up 7.8% at $78.55 a barrel.

West Texas Intermediate contracts for April, which are tightly linked to U.S. gasoline prices, jumped 7.3% to $71.89 a barrel as investors worried the conflict would affect supply flows through the Strait of Hormuz, which handles around a fifth of all global oil and LNG shipments on any given day.

"U. S. consumers are already stretched, and gasoline prices are acutely politically sensitive going into midterm territory," said ING's global head of macro, Carsten Brzeski. "Higher oil prices would also complicate the Federal Reserve's future monetary policy path."

"A second supply-side inflation shock, while the inflationary impact from tariffs is still unfolding, could make further rate cuts hard to justify, at least in the nearer term," he added. "At the same time, if the conflict drags and uncertainty weighs on business investment and consumer confidence, the growth outlook darkens too."

Lori Calvasina, who heads U.S. equity strategy at RBC Capital Markets, said she isn't ready to change her end-of-year forecasts for the S&P 500, which include a price target of 7750, given that investors had started to discount a U.S. strike on Iran earlier this year.

Still, she sees a wider or more prolonged conflict affect forward earnings projections for the benchmark, which would weigh on multiples and drag benchmark indexes lower over time.

But, like others, she also thinks developments in oil markets, linked in part to Iran's ability to disrupt the Strait of Hormuz, will prove crucial for stock markets over the coming weeks.

"In our view, the key issue is not whether there is a short-term spike in oil prices," she said. "What's more relevant to stocks, in our opinion, is whether a sustained impact to oil prices is seen, which is what we think would have more of a potential to damage confidence at various levels."

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 02, 2026 06:35 ET (11:35 GMT)

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