How could the Iran conflict affect the U.S. economy?

The Iran conflict could affect the U.S. economy by raising oil prices, disrupting shipping routes, increasing inflation pressure, and making businesses and consumers more cautious.

Why do oil prices matter so much during a conflict with Iran?

Iran sits in a region that is critical to global energy production and shipping. If conflict affects supply or transportation routes, oil prices can rise quickly and influence inflation, transportation costs, and consumer spending.

What is the Strait of Hormuz and why is it important?

The Strait of Hormuz is one of the world's most important oil transit routes. Disruption there can affect global energy markets, shipping costs, and supply chains.

Could the Iran conflict increase inflation in the United States?

Yes. If the conflict leads to higher oil and shipping costs, businesses may pass those costs on to consumers, which can contribute to higher inflation.

How might the Federal Reserve respond?

The Federal Reserve may become more cautious if the conflict raises inflation risks while also weakening growth. That could delay interest rate cuts or keep policy tighter for longer.

Is the U.S. economy protected because of domestic energy production?

Domestic oil and gas production gives the U.S. more protection than some other countries, but it does not eliminate risk. The U.S. is still connected to global markets, trade flows, and energy pricing.

Can Emerging Markets Withstand Middle East Shocks in 2026?

Emerging markets have been rattled by the latest Middle East conflict, with investors pulling money from risk assets as war pressures currencies, stocks, and bonds. But despite the recent selloff, some investors believe the broader rally in emerging markets may not be over.

That is because many emerging economies entered this shock from a stronger position than in previous crises. Central banks have built more credibility, inflation has come under better control in several countries, and some frontier and emerging markets have improved investor access. If oil prices do not stay elevated for too long and the conflict does not spiral further, investors say emerging markets could still recover.

Why Emerging Markets Are Under Pressure

The conflict involving Iran has pushed investors toward safer assets such as the U.S. dollar, gold, and cash. That move has hit emerging market currencies, stocks, and bonds at the same time.

The reaction has been severe. Emerging market assets suffered their biggest weekly losses since the COVID-19 pandemic, while MSCI’s emerging market equities index lost more than $1 trillion in market value from its recent peak. Some of the sharpest declines came from markets like South Korea, where the KOSPI plunged before rebounding.

This is the classic risk-off pattern. When geopolitical uncertainty rises and oil prices threaten global growth, investors usually move out of higher-risk assets first.

Is This the End of the Emerging Market Rally?

Some large institutions have already turned more cautious. JPMorgan reduced its overweight position on emerging market foreign exchange and local currency bonds, while Citi cut its exposure to emerging market foreign exchange.

Even so, not all investors believe this marks the end of the rally.

Some market participants see the current selloff as a pause rather than a structural reversal. The recent move may have been driven more by fast money and hedge fund repositioning than by long-term capital fully abandoning the asset class.

That distinction matters. If long-term investors are still interested and fundamentals remain intact, emerging markets may regain momentum once the immediate shock fades.

Stronger Fundamentals Could Support a Rebound

One reason for optimism is that many emerging and frontier markets have spent years improving their financial resilience.

Some central banks have taken a cautious approach to easing, which has helped keep inflation in check and support local currencies. Countries such as Egypt and Nigeria have also taken steps to make it easier for investors to move money in and out of their markets, improving confidence and flexibility.

For investors, this suggests that today’s emerging markets are not necessarily as fragile as they were during past crises. In some cases, the recent outflows may actually prove that these markets are functioning more normally, even under stress.

Featured on Today’s InvestTalk Episode

This topic is featured in today’s InvestTalk episode covering the market and economic impact of the Iran conflict.

Oil Prices Remain the Biggest Risk

The single biggest threat to emerging markets may be oil.

If oil prices remain above $100 per barrel for an extended period, the consequences could be significant. Higher energy costs could push inflation higher, slow global growth, and make it harder for emerging market central banks to continue cutting rates.

That would create more pressure on import-dependent economies and could deepen the move out of risk assets.

At the same time, the impact of higher oil prices is not uniform. Some Latin American commodity exporters, for example, could benefit from stronger prices, even as broader emerging market sentiment remains weak. This is one reason investors are increasingly focused on country selection rather than treating emerging markets as a single trade.

Why Some Investors Still Like Emerging Market Stocks

Despite the volatility, some investors remain constructive on emerging market equities.

Part of the reason is valuation. Emerging market stocks continue to trade at a discount to developed markets, while also carrying stronger earnings growth expectations in some cases. That mix of lower valuations and higher growth potential is still appealing to investors willing to look beyond near-term geopolitical noise.

In other words, the recent selloff may have made some parts of the emerging market universe more attractive, not less.

South-to-South Investment May Offer Support

Another reason emerging markets may prove more resilient this time is the changing pattern of global capital flows.

Increasing “South-South” investment, where capital from Asia and Gulf sovereign wealth funds flows into other emerging economies, may provide an important buffer. These investors may be less likely to pull money out of emerging markets during every global shock, especially compared with traditional crossover investors.

That shift could provide a more stable source of support for some countries and reduce the risk of a broad-based rush for the exit.

What Investors Should Watch Next

The next phase for emerging markets will depend on a few key factors:

whether the Middle East conflict broadens further
how high oil prices rise, and how long they stay elevated
whether the U.S. dollar continues strengthening
whether long-term investors step back in after the selloff
which emerging economies show the strongest policy credibility and resilience

If the conflict remains contained and oil prices stabilize, the selloff may prove temporary. But if geopolitical risks intensify and energy prices stay high, the pressure on emerging market assets could continue.

Final Thoughts

Emerging markets are under pressure, but they may not be out.

The recent selloff shows how quickly global investors can flee risk when geopolitical shocks hit. But it also highlights an important shift: many emerging economies are entering this period with stronger fundamentals, more credible policy frameworks, and better investor access than in past crises.

That does not eliminate the risks. Oil remains the biggest variable, and a prolonged energy shock could change the outlook quickly. Still, for investors willing to look beyond the immediate panic, emerging markets may still offer selective opportunities in 2026.

Featured on Today’s InvestTalk Episode

This topic is featured in today’s InvestTalk episode covering the market and economic impact of the Iran conflict.

Sign Up for Marketing Emails

Stay in the loop with everything InvestTalk.