We think the U.S. equity market was already starting to digest the escalation in the region coming into the weekend. The S&P 500 has moved sideways so far in early 2026, reined in by a fairly long list of concerns – AI fears, private markets concerns, an underwhelming reporting season, extended valuations, and an increase in a few different flavors of geopolitical risk.
On this latter point, it’s worth noting that expectations the U.S. would strike Iran in betting markets were fairly elevated throughout early 2026, though expectations that Khamenei would be out as Supreme Leader in betting markets were lower. Both the choppiness in the S&P 500 this year and the outperformance of the Energy sector were reflecting heightened geopolitical risk to some degree.
Historically, elevated geopolitical uncertainty isn’t good for S&P 500 P/E multiples broadly, which have already been under pressure since August. In recent years we’ve seen some deterioration in S&P 500 median P/Es when uncertainty regarding national security has spiked in spring 2025 (Liberation Day tariffs), 1Q22 (Russia’s invasion of Ukraine), and 1Q20 (COVID). This is something we also saw in early 2003 as the U.S. was preparing to invade Iraq.
“Both the choppiness in the S&P 500 this year and the outperformance of the Energy sector were reflecting heightened geopolitical risk to some degree.”
Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
Elevated geopolitical uncertainty/risk has become a feature of the post-COVID environment, but could weigh on sentiment. On the corporate side, references to geopolitics on public company earnings calls have been extremely high in recent years relative to their pre-COVID history. Companies have often emphasized their ability to manage through challenges, and we tend to see them describing the geopolitical backdrop as evolving, dynamic, unpredictable, and fluid. On Middle East tensions specifically, support for oil prices from Energy companies and boosted demand for hedging from Financials companies have also been discussed.
We are eager to see what companies say about the weekend’s developments in coming days, but for now expect the “manage through” messaging to persist. We will also be monitoring how these latest developments in U.S. foreign policy impact consumer confidence/sentiment (which has been stabilizing around extremely low levels in both the Conference Board and University of Michigan surveys) as well as public opinion polls (where voter approval on foreign policy has been extremely low).
