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“Bella, horrida bella!”

A famous Latin quote from Virgil's epic poem, The Aeneid, translated to "Wars, horrid wars!"

The war in Iran has plunged markets and global economies into chaos. And I don’t see any signs that this will be resolved any time soon. There may be a cooling in tempers and a diplomatic channel that could turn this around, but I would imagine that we are only beginning to see the downstream consequences of this war.

We are three weeks into an oil shock that the IEA is now calling the greatest global energy supply disruption in history.

The United States and Israel campaign against Iran began on the last day of February, the Strait of Hormuz closed within days, and by mid-March almost 10 million barrels per day of global crude production had been halted.

Just two days ago Iraq declared force majeure (freeing them from liability when an extraordinary event, like a war, makes performing their contractual obligations impossible) on all oilfields after running out of storage capacity.

Two of Kuwait’s largest oil refineries were struck by drones the same day.

Brent crude settled at $112.19 a barrel.

The S&P 500 closed the week at 6,506, which is its fourth consecutive weekly loss, and is down 7.4% from the January high, and officially in correction territory.

The VIX touched 26.78 and remains elevated, as volatility has become the new normal in markets this year.

The 10-year Treasury yield pushed to 4.39%, up 11 basis points on the week, as energy-driven inflation expectations quietly repriced what the Federal Reserve can and cannot do at the moment.

This unique combination of rising yields, falling equities, a stronger dollar, is exactly the setup that punishes the late-cycle investor. And we are in the thick of it right now. Chances are your portfolio took a pretty significant hit in the last month if you are reading this, of course depending on your allocation. But to say it’s been a brutal month is a fair statement at this point.

This week's update covers what the market is actually pricing in, and where the structural opportunities sit.

We are also going to cover the analogy I keep seeing that I think most investors are reaching for. I have heard commentary from all over mainstream financial media that this is exactly like the Gulf War of 1990. I think that comparison is probably the wrong one.

 Global Market Snapshot: What the Numbers Are Saying

United States

The major averages are under their 200-day moving averages for the first time since late 2024.

The equal-weight S&P 500 is holding above its 200-day, which is an important distinction, because it tells you this isn't a broad capitulation. At least not yet. The equal weighted S&P 500 index is by nature more concentrated in the names most exposed to energy costs and slowing growth expectations – here I’m talking about tech, consumer discretionary, airlines, etc.

Market breadth on the Nasdaq has deteriorated to levels not seen since 2023, with only 35.5% of components trading above their 200-day SMAs, per Schwab's analysis.

That is a weak-handed market looking at the possibility of a recession.

This does some significant damage to the rotation trade, although I don’t believe that this story is over yet. I have written at length about the likelihood that we are in the middle of a long-term trend that will see more investment in smaller companies, international companies, both developed and emerging markets, and more asset-heavy, traditional value companies in the US. The rotation trade relies on these businesses outperforming and seeing more capital flowing in than the big tech/ Magnificent 7 names that have dominated the market for so long and the fast-growing software companies that have crushed the broad market in the last decade plus.

I still believe that the rotation has legs, but the geopolitical and economic shock from the Iran war is a massive risk. There is a growing chance of a global recession, which would hit these businesses hard.

For the week, the S&P 500 lost roughly 2%.

The Nasdaq fell nearly 2% and is testing the August 2025 high-week close. The Dow closed at 45,577.

The Russell 2000 dropped 2.26%, closing at 2,438.

As we’ve noted, these small caps carry more domestic energy cost exposure and higher floating-rate debt, which makes them doubly vulnerable in this environment.

International Markets

Charles Schwab's research team said it plainly in their March 13 analysis that Asia appears most vulnerable, with Europe facing meaningful exposure.

They aren't wrong.

Asia imports roughly 75% of its crude from the Gulf.

China, Japan, India, and South Korea depend on a supply corridor that is now functionally closed.

The South Korean Kospi Index fell more than 12% in a single session in early March as chipmakers were sold indiscriminately; it has recovered some but remains well below February levels.

In Europe, the problem is different.

The continent came into this conflict with gas storage at roughly 30% capacity after a hard winter. Dutch TTF gas prices have nearly doubled.

European Central Bank held rates on Thursday and raised its 2026 inflation forecast to 2.6%, while cutting growth to 0.9% , a classic stagflationary setup if the history books are true.

The Stoxx 600 is under pressure. Energy producers like Equinor and Vår Energi are up sharply which is not surprising, but industrial and consumer names are not.

The Bank of England also held rates but warned of higher inflation and possible rate increases if the energy shock persists.

Rates & Commodities

The 10-year Treasury yield rose 11 basis points this week to 4.39%. The 2-year rose 15 basis points to 3.88%.

Both moves are pricing in the same thing.

This assumes serious energy-driven inflation that the Fed cannot look past indefinitely.

The market is now pricing a single 25-basis-point cut in December 2026 and absolutely nothing before that.

Before the conflict, two to three cuts were the clear consensus from every analyst or investor you could hear from. That repricing of the rate path is, in my view, the most underappreciated force currently at work in asset prices.

Citi now forecasts Brent reaching $120 in the near term, with a $150 bull case if disruptions intensify. J.P. Morgan's commodity head Natasha Kaneva said the market has moved from 'pricing pure geopolitical risk to grappling with tangible operational disruption.'

Gold closed at $4,574 per ounce on Friday, down 0.67% on the session.

This has been an interesting move as gold has dropped significantly from its $5,594 January record. While many would assume that in times of war, gold would automatically continue it’s massive climb, there is a clear reason that the opposite happened.

Remember that a stronger dollar makes dollar-denominated gold more expensive for foreign buyers. And higher expected rates raise the opportunity cost of holding a non-yielding asset, like gold for example.

So as the dollar strengthened and rate-hike expectations emerged, which is exactly the environment where gold struggles, we’ve seen a pullback.

The DXY settled near 99.46.

Three Trends I'm Tracking

1. The Strait Premium And How Long Does It Hold?

The most important variable in any macro model right now is the duration of the Strait closure. And after that, what is this conflict going to look like in the coming months? Is there any hope of a diplomatic off-ramp at this point?

The IEA estimates 10 mb/d of total production is currently curtailed, with more at risk.

It just released 400 million barrels from emergency reserves on March 11, a very significant move, but one that buys weeks at most. The structural problem is that production shut-ins are not like a light switch. Rystad Energy has noted that oilfields forced offline could take 'days or weeks or months' to restart, depending on field type and the nature of the shut-in.

J.P. Morgan and Goldman Sachs both have base cases that assume de-escalation within four to six weeks, which would see Brent fall back toward $70-80 by year-end.

To me that is an extremely optimistic base case.

The harder problem is Qatar's LNG.

Iranian strikes on the South Pars gas field mean repairs could take years according to QatarEnergy. Qatar supplies roughly 20% of global LNG. That market is structurally tighter than crude, and I'm watching LNG spot prices in Asia as the leading indicator for where the energy shock becomes a growth shock.

What do we make of all of this for our own positioning and rebalancing?

First, realize that the energy sector has been the only consistent outperformer. XLE and XOP are the obvious vehicles.

I have more interest in the U.S. LNG exporters here.

Cheniere Energy (LNG) and New Fortress Energy (NFE) - because they are direct beneficiaries of a supply shortage the rest of the world simply cannot quickly fix.

A word of caution though. The worst time to buy a sector is when it's leading every news headline. I'd use any pullback in crude below $90 as an entry. Don’t be so eager to chase this week's prices.

2. The Defense Divergence

While the broad market has been grinding lower, aerospace and defense has been quietly doing something else, as we predicted it would.

ITA, the iShares U.S. Aerospace & Defense ETF, is up substantially YTD and held its ground this week as the S&P 500 fell.

The war in Iran has functioned as a live demonstration of the military capability gap between the U.S. and its adversaries, and every NATO member watching has accelerated its own spending plans.

NATO has committed to 5% of GDP on core defense by 2035.

That commitment existed before February 28. But now there is political will behind it as Europe realizes that they are going to be completely responsible for their own defense.

BlackRock's investment institute, in its March 16 weekly commentary, prefers U.S. stocks over international equities in this environment and sees the energy shock as a 'visible global macro shock no matter the endgame.'

What they don't say directly, but the data implies, is that U.S. defense and energy are the two sectors with structural earnings support regardless of how the conflict resolves.

The deeper structural point is that defense spending is the most durable government expenditure in a crisis. It doesn't get cut when inflation rises. It doesn't slow when growth decelerates.

The budget cycle in Washington for FY2027 is already being reshaped by the events of the last three weeks. Lockheed Martin, RTX, L3Harris, and Northrop Grumman all have multi-year backlogs that just got longer.

ITA and SHLD (Global X Defense Tech ETF) are the cleanest ways to own this without betting on a single contractor.

3. The Dollar Paradox. Why Gold Is Selling Off When You'd Expect It to Rise

The conventional wisdom says that when bombs fall, gold rallies.

 It did. Briefly.

Gold spiked to $5,423 per ounce in the first session after the strikes on Iran, then proceeded to fall nearly 16% to the current level near $4,574.

The explanation matters because it tells you something important about the current regime. We noted this earlier in the newsletter but it is definitely worth repeating and digging into.

When an energy shock is simultaneously inflationary and likely to trigger higher rates, gold faces a headwind from two directions: a stronger dollar and rising opportunity cost.

The move lower in gold appears to be driven by a flight to liquidity – in other words, investors are simply moving to cash. We have a strong dollar and bond yields trading higher.'

This is not a sign that gold is a broken thesis. But it is absolutely a sign that the market is in a risk-off liquidity phase. People are moving to cash as a defense mechanism and it makes sense given the situation.

The long-term gold thesis has not changed. But in the near term, gold is being treated like an equity with a beta to risk-off sentiment, rather than a monetary metal. If the dollar reverses on any Fed pivot signal or ceasefire news, gold's setup becomes attractive again quickly.

I'm watching DXY 97 as the level where gold likely finds its footing.

The Big Idea: 1973 Is the Wrong Parallel. Here's the Right One

The comparison to 1973 is everywhere this week. It's understandable.

An oil embargo, supply disruption, stagflation risk – all of those features seem to rhyme. But the 1973 crisis unfolded slowly. It took months for price increases to fully feed through to the economy. The market had time to adjust, and get humbled badly, over several years.

A better historical parallel might be the six-day Suez Crisis of 1956.  Not for its military parallels, but for economic ones. That crisis closed the Suez Canal for months, disrupting oil flows to Europe.

What most investors forget is that markets fell sharply at the outset, then rallied when the threat appeared contained, then fell again when the economic consequences proved more persistent than anyone had modeled.

It was basically a panic, then a relief rally, then a second leg down when reality caught up with the optimism.

The behavioral pattern we're seeing now fits that template pretty well.

The S&P 500 was down 8% in the first week of the conflict. It bounced 3 - 4% when U.S. forces struck Kharg Island and Iranian retaliation appeared temporarily deterred. But then it continued lower as the operational disruptions. This was everything from Iraq's force majeure, Kuwait's refinery attacks, Qatar's LNG shutdown, which all made it relatively clear that this is not a situation that resolves in a week.

The risk that investors are underpricing is not $150 oil, I think that's priced as a tail scenario.

The risk they're underpricing is a prolonged period of elevated energy costs that keeps core inflation sticky just long enough to prevent the Fed from cutting when the economy slows. That is the classic stagflation trap that can be brutally persistent. When you have growth slowing, inflation not falling, and a central bank with no good move, you can get stuck in the mud.

The Fed held rates at 3.50-3.75% on March 18 , which was expected and the second consecutive hold.

The new projection is one cut in 2026, one in 2027.

PCE inflation forecast for 2026 was revised up to 2.7%. GDP for 2026 was revised up slightly to 2.4%.

Powell said job creation has 'slowed to essentially zero.'

One Fed governor, Stephen Miran, dissented in favor of an immediate cut as the lone dove in a room that has grown notably more hawkish as oil pushes into triple digits.

What this means in practical portfolio terms is that the traditional 60/40 portfolio, which is long equities for growth, long duration bonds for safety, faces headwinds from both sides simultaneously.

Rising yields hurt bond prices.

Energy-driven inflation compresses equity multiples.

The assets that work in this environment are the ones that either profit directly from higher energy prices, or carry pricing power sufficient to pass costs through to customers without margin compression.

My own positioning reflects this.

I've trimmed rate-sensitive REITs and long-duration bonds from the portfolios I track. I've added to energy producers and defense names. Gold is something I want to own more of at lower prices, not just because of the geopolitical premium, which is volatile, but because the structural thesis of a weakening dollar reserve system is intact.

If DXY breaks below 97 on any de-escalation news, that becomes an actionable entry.

What to Watch: The Data Points That Change the Thesis

The single most important development is a credible ceasefire signal or Strait reopening.

Netanyahu said this week that Israel is assisting U.S. efforts to reopen Hormuz, and that Iran 'no longer has the capability to enrich uranium or produce ballistic missiles.'

If that holds, the energy shock could compress faster than markets expected, and a violent reversal in crude would likely trigger a sharp risk-on rally, gold bounce, and duration trade.

Some have suggested that the Strait could 'partially reopen in 2-3 weeks.' I treat that as an optimistic scenario, not a base case.

Four specific items worth watching this coming week and month:

First, the March CPI (April release): February CPI held at 2.4% year-over-year, core at 2.5%, per the Chase report. Those numbers do not yet capture the oil shock. The March CPI will be the first inflation print with Brent north of $100 baked in.

If core CPI accelerates meaningfully, the Fed's 'one cut in 2026' scenario gets revised down to zero cuts. Watch for that print.

Second, Kevin Warsh Senate confirmation: Powell's term expires May 15. Warsh has been described as potentially more hawkish than Powell in some contexts but more dovish in others - the uncertainty itself creates policy risk. Any signals from his confirmation hearings about the Fed's reaction function to an oil shock will move the rate market.

Third, IEA reserve release pace: The 400 million barrels authorized March 11 is being drawn down. The pace of release will influence crude prices in the near term more than any geopolitical headline.

Fourth, Dallas Fed Energy Survey (released March 26): This survey captures U.S. oil producer sentiment and activity in real time. If domestic producers are accelerating drilling in response to the price spike, that is supply coming online that will eventually moderate prices.

But If they're cautious, the supply response will be slower.

Uncertainty Is Not a Reason Not to Have a View

In the winter of 1990, when Saddam Hussein's tanks crossed into Kuwait, most institutional investors initially froze. The shock was too large, the variables too uncertain.

But it seems clear that any investors who thought clearly about which scenarios were discounted and which were not, and positioned accordingly, made extraordinary returns over the following 18 months as the Gulf War resolved faster than feared and energy prices collapsed back to baseline.

The same binary exists today.

If the conflict resolves within six weeks, as Goldman's base case assumes, oil retraces to $70-80, the Fed cuts once before year-end, and the S&P 500 is probably back toward 6,800-7,000 by summer.

If the disruption extends through Q3 - the stagflation scenario becomes the base case, and the portfolio that wins is energy, defense, real assets, and short duration.

I'm sizing for the second scenario while keeping optionality for the first.

That means I'm not abandoning equities entirely, but I've reduced exposure to rate-sensitive names and increased energy weight to roughly 12% of the equity book.

Defense is at 8%. Gold is at 5% - below where I'd want it structurally but above zero.

Cash is at 10%, which I'll deploy into either energy on a pullback or broadly if VIX closes above 30 for two consecutive sessions.

The market that eventually stops panicking and starts pricing outcomes.

We're in the transition between those two phases.

The investors who confuse uncertainty with the absence of a view will be the ones watching from the sidelines when the next leg, up or down, becomes clear.

Disclaimer

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks, funds, or investments mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.