All eyes on the Middle East

Operation Epic Fury is now in motion, and investors are recalculating risk. Almost every industry in the market felt the effects of the joint US-Israel attack on Iran over the weekend, but here are three key industries that were in the spotlight today, and what lies ahead for each:

Energy

Brent crude surged 6.82% today as traders added a fresh risk premium tied to Middle East supply uncertainty.

The immediate focus is the Strait of Hormuz, the key shipping lane connecting Gulf oil producers to global markets, through which 20% of the world’s crude supply passes. Insurers began pulling coverage for tankers using the route over the weekend, and as a result, only about 4 million barrels transited on Saturday—a sharp drop from the typical 16 million that move through each day.

Then, late this afternoon, Reuters reported that Iran has closed the Strait, threatening to set fire to any ships that try to pass.

Some analysts say a prolonged disruption could push oil above $100, with JP Morgan’s Natasha Kaneva warning prices could reach $120 in a worst-case scenario. Others argue supply buffers may limit the upside, but agree that a full shutdown of the Strait will trigger a major global shock.

All of that is good news for oil companies like Exxon Mobil (up 1.13%), Occidental Petroleum (up 2.13%), and Chevron (up 1.48%, hitting a record closing high).

Defense

Defense stocks jumped as expectations for higher military spending increased. Classic contractors rose, with Lockheed Martin up 3.37%, RTX gaining 4.71%, and Northrop Grumman advancing 6.02%. But the new nature of warfare has prompted a new wave of companies also worth watching: AI company Palantir climbed 5.78%, missile system provider Karman gained 5.6%, and drone manufacturer Ondas jumped 5.85%.

The rally wasn’t limited to US players. European names such as BAE Systems, Renk, Leonardo DRS, and QinetiQ also moved higher, reflecting the view that governments around the globe may accelerate defense outlays amid rising geopolitical tensions.

Travel

Fuel represents roughly 20% of operating expenses at American Airlines, 17% at Delta Air Lines, and 21% at United Airlines. Oil supply disruptions, combined with expectations of softer travel demand in the region around Iran (and around the world in general), sent shares of all three airlines tumbling.

Cruise operators also felt the pressure of higher fuel costs and lower demand: Carnival fell 7.64%, Norwegian Cruise Line slipped 10.53%, and Royal Caribbean declined 3.25%

So, what happens next?

History provides context: since 1980, geopolitical shocks have rarely had a lasting impact on equities. Barclays data shows that the S&P 500 is typically flat the following day and often steadies within weeks.

That’s the view of Steve Eisman, the investor well known for betting against the housing bubble before the 2008 financial crisis. He argues that investors shouldn’t rush to conclusions, and that the conflict in Iran could even be a long-term positive for markets. “People react because of what’s happening, oil prices are obviously up. But if it goes well, two months from now, prices will be back to where they were,” Eisman told CNBC.

Still, the key variable is duration. “In a prolonged period of uncertainty, increases in oil prices could generate a global inflationary scare, which in turn may reduce the likelihood of interest rate cuts by the US Federal Reserve, currently expected for later this year,” Adam Hetts, Global Head of Multi-Asset at Janus Henderson, wrote in a note.

For now, Hetts suggests taking a long-term view and staying diversified, with exposure to high-quality and safe-haven assets.—SY