The word “stagflation” had been circulating in market commentary since early February, when a weak US jobs report coincided with the first serious signs that the Iran conflict might materialise. Three weeks into the conflict, it has moved from a tail risk to the dominant framework through which professional investors are now interpreting every data point.
The S&P 500 has fallen in each of the past three weeks, its longest losing streak in nearly a year, and closed Friday at its lowest level of 2026, with the index now roughly 5% below its January peak.
West Texas Intermediate crude settled at $98.71 per barrel on Friday and had touched $119.48 in overnight trading earlier in the week, with Brent briefly topping $100 — the first time since August 2022, driven almost entirely by the effective closure of the Strait of Hormuz.
Iran’s new Supreme Leader Mojtaba Khamenei escalated the messaging on Thursday, saying the Strait should remain shut as “a tool to pressure the enemy,” a statement that sent oil prices higher again and reinforced fears that the closure has become a deliberate long-term strategy rather than a temporary consequence of the conflict.
The University of Michigan’s consumer sentiment survey, released Friday, came in at 55.5 for March — just below the 55.3 analyst consensus — and included a particularly revealing detail: sentiment improved in the interviews conducted before the Iran strikes, then fell sharply in the nine days after.
“Interviews completed prior to the military action in Iran showed an improvement in sentiment from last month, but lower readings seen during the nine days thereafter completely erased those initial gains,” said survey director Joanne Hsu.
The historical precedent that analysts keep returning to is 1973, when the OPEC oil embargo combined with a US recession to push the S&P 500 down more than 40% and produce what Capital Economics describes as a “lost decade” for long-term investors.
The current situation has meaningful differences from 1973 — the US is now a net energy producer, the Federal Reserve has more credibility, and the starting position of corporate balance sheets is much stronger — but the basic mechanism, an external oil shock hitting an economy already dealing with inflation, is structurally similar.
“Earnings are pretty good, but sentiment is difficult,” said David Aspell, chief investment officer of global macro at Mount Lucas Management. “The oil part of the sentiment and equity valuation embeds an interest rate path which is now being questioned.”
The Federal Reserve meets Wednesday, and while no rate change is expected, traders will be watching closely for any language shift that acknowledges the conflict’s inflationary implications, given that futures markets have already abandoned any expectation of a September cut and are now only pricing a single December move.
Defense stocks and energy companies have outperformed the broader index significantly since the conflict began, with Boeing, UnitedHealth, and Verizon among the few notable green points on Friday’s otherwise broadly red tape.
The bearish argument is simple: if oil stays above $100 for months, inflation reaccelerates, the Fed cannot cut, consumer spending contracts, and corporate earnings guidance for the second half of 2026 starts coming down — all four steps in a chain that ends at a materially lower S&P 500 than where it sits today.