Markets are adjusting to a lengthening Iran conflict, with investors increasingly factoring in a more protracted standoff and a heightened risk of stagflation. That dynamic helped push December 2026 oil futures to fresh intraday highs on Monday, and saw government bond yields trade close to multi-year highs.
Yet, despite those pressures, equity markets have so far shown notable resilience. The S&P 500 is trading about 1.3% below its record high, while Europe\'s STOXX 600 sits roughly 4% beneath its peak. Credit spreads on both sides of the Atlantic have tightened rather than widened since the conflict began.
Deutsche Bank macro strategist Henry Allen offered a framework that helps explain why risk assets have remained relatively stable. Allen noted that historically, major equity selloffs tied to oil shocks have only followed when three conditions occurred together - a sustained energy shock, economic data showing clear recessionary momentum, and forceful central bank tightening. He argued that none of those three conditions are present at the moment.
On the oil market specifically, the forward curve still signals expectations that the current disruption may not persist. Allen pointed out that the curve remains heavily backwardated, with a persistent gap between near-month Brent futures and contracts six months out. Inline with that view, markets are pricing the event more as a temporary spike than a long-term supply change, and that has helped limit the downside pressure on risk assets. He observed that, even at their session lows, neither the S&P 500 nor the STOXX 600 entered technical correction territory.
By contrast, in prior shocks such as in 2022, 12-month Brent futures briefly rose above $100 a barrel, signaling expectations of elevated prices into the subsequent year. That historical episode helps illustrate how different forward-curve expectations can alter market sentiment.
The growth backdrop has also remained a stabilizing factor. U.S. payrolls expanded by more than 100,000 in both March and April - the first consecutive readings above that threshold since 2024. Separately, the Atlanta Fed\'s GDPNow model currently estimates annualized second-quarter growth at 4.0%.
April purchasing managers indices across the U.S., UK, Brazil, India, China, Japan, and Australia all remained in expansionary territory, suggesting global activity has not tipped into contraction.
Central bank positioning has not added to market stress. The Federal Reserve\'s April statement retained an easing bias, and market-implied tightening remains small compared with earlier episodes. Allen highlighted that the tightening priced into markets - roughly 75 basis points of European Central Bank hikes in 2026 and about 15 basis points from the Fed - is minimal next to prior cycles that saw several percentage points of rate increases.
In short, unless the three conditions Allen identifies change materially - a persistent energy shock, a clear shift toward recessionary data, and substantial tightening from central banks - the relative sturdiness of equities aligns with historical patterns observed over recent decades.
What this means for markets
- Oil price volatility and bond yields are the immediate stress points that could influence risk assets.
- Near-term equity resilience reflects market expectations that the energy shock is temporary, supported by solid economic data and limited tightening priced by central banks.
- Sectors sensitive to energy costs and financing conditions are most exposed if the situation evolves into a sustained shock or triggers stronger policy responses.