When Donald Trump announced his Liberation Day tariffs in April last year, many market participants worried that the second Trump presidency could prove devastating for the stock market. However, after an initial dip, a period of steady growth ensued as agreements favourable to the US were reached with several key trading partners. Between that early April low and the end of 2025, the big two Nasdaq 100 and S&P 500 gained an average of 35% for a handsome annual return of over 20%. But then, with the start of 2026, the White House embarked on a campaign of military-enforced regime change, first in Venezuela and now in Iran. The removal of non-aligned leaders in both of these key oil-producing countries would, in theory, help prolong the US's status as world hegemon, but in practice, this has come at the short-term expense of domestic equities. As the first quarter of 2026 draws to a close, US stocks have now returned around -1% YTD, which will surely impact investor confidence for the rest of the year. Other consequences of the conflict that are likely to exacerbate the impact include rising oil prices and possible inflation risks that prevent full-scale central bank intervention. But what are the real-world effects of these factors likely to be for US equities, and is there an alternative other than gold or cash?
War bucks
The US war on Iran and the wider Middle East crisis have proven a catalyst for the stock market downturn. The rapidly rising oil prices and global uncertainty generated by this sudden escalation of what was originally a regional disagreement will surely impact productivity and general business sentiment. With oil briefly hitting $119 this week before eventually settling around $100 a barrel, the cost of doing business is not only much higher than before, but it is also wildly unpredictable. According to data from prediction market Kalshi, the odds of a recession this year spiked to as high as 35% early on Monday, which is up from about 20% in early February. With apparently no resolution in sight, the risk of a protracted bear market that might see US stocks drop 20% or more grows with each passing day. Such a market plunge would likely depress spending, even for more affluent households, which, without strong intervention, would reduce spare income for equities investment and prolong the bear market.
However, the Fed, under its new Trump-friendly chief, Kevin Warsh, is likely to take mitigating action. It's no secret that Warsh was selected to deliver the rate cuts Trump has been demanding of Powell for some time now. Price pressure stabilised in February at 2.4%, as had been predicted, which would allow for rate cuts in April or May. However, the war with Iran and increasing oil prices could reverse this trend in March, restraining Warsh's hand depending on the extent of the uptick. Other key data to watch will be jobs and the PMI, with these metrics informing the extent of any stimulus the Fed can offer. In short, the US is unlikely to face a severe protracted downturn, but we could see a year of net negative or paltry returns depending on the severity of the crisis and the response to it.
Going East
While the US stock market has faced significant headwinds, with the Nasdaq and S&P 500 indices posting substantial losses, the global picture tells a more nuanced story. Several promising emerging markets have proven more resilient in the face of the recent geopolitical turmoil. Notably, Chinese stocks have weathered the storm better than their international counterparts since the conflict began, with the CSI 300 index losing just 0.1%. That's a surprisingly muted reaction given China's heavy reliance on imported energy. This relative stability can be attributed, in part, to China's concerted efforts in recent years to accelerate its green energy transition and promote electric vehicle adoption. These strategic initiatives have helped to insulate the economy from the full brunt of rising fuel costs. Additionally, the yuan has held steady against the US dollar, and government bond yields have remained largely unmoved, further bolstering China's financial resilience. Elsewhere in Asia, the picture is more mixed, with Japan, South Korea and India all experiencing declines between 5% and 10%.
However, the Chinese market's combination of low current valuations, which are significantly below pandemic-era levels, and solid momentum, with the CSI 300 and China A50 indices up 20% and 10%, respectively, over the past 12 months, presents intriguing opportunities for investors. Tech giants like Alibaba and Tencent are trading at P/E ratios below 20 and offering attractive long-term growth prospects. Meanwhile, companies such as Haier Smart Home and Midea are providing fair valuations coupled with dividend yields exceeding 5%. As the global economy navigates these turbulent times, the divergent performance of international markets underscores the importance of taking a nuanced, geographically diverse approach to investment strategies.