Geopolitical Update: May 2026
Entering its third month, the U.S.-Iran conflict remains at a stalemate, with little progress toward a long-term resolution. The price of crude oil surged above $100 per barrel in mid-March amid geopolitical tensions in the Middle East and prices have fluctuated since then. Oil briefly fell back below $100 on hopes of a swift end to the conflict, but has since crept back up to its highest level on the year, with traffic through the Strait of Hormuz effectively coming to a standstill. Equity markets began to look past the energy supply disruption beginning on the last day of March and rallied through the month of April. Volatility has fallen back near long-term median levels as the S&P 500 recovered its entire 9% pullback, eclipsing new all-time highs.
Bond markets also experienced elevated volatility at the start of the conflict, as yields across most areas of the curve increased 30-40 bps on concerns that higher energy prices would boost inflation, leaving the Federal Reserve no choice but to keep rates higher for longer. While volatility in the fixed income market has declined, we have not seen yields return to pre-conflict levels.
The longer the conflict lasts, the higher the risk of negative economic impacts. The longer oil prices remain above $100/bbl, the more adverse the impact of higher energy prices will have on the consumer and the economy. Spending will likely shift away from discretionary items (such as travel, restaurants and automobiles) as more of consumers’ spend must go toward fuel costs.
What are the economic risks to a prolonged conflict?
Economic expectations for 2026 have not changed materially. Estimates for year-end levels of economic growth, inflation and unemployment remain at or near levels estimated at the beginning of the year.
The risk remains, however, that sentiment could change swiftly in the days and weeks ahead if energy shipping routes are not opened soon. While we have not seen changes to economic estimates to this point, higher energy prices for a prolonged period can contribute to inflation. Higher inflation not only potentially handicaps the Fed’s ability to cut interest rates, but as higher prices flow through to the economy and have a greater impact on consumer spending, decreases in global GDP growth rates would likely begin to materialize as well.
Will the U.S. enter a recession as a result of the conflict?
Energy price spikes rarely lead to an economic recession in the U.S. A recent survey of economists suggests that the probability of a recession would exceed 50% if U.S. Crude Oil prices remain above $100/bbl for a period of 10+ weeks. As of the end of April, U.S. oil prices have fluctuated around the $100/bbl mark for the past 4-6 weeks but have not consistently been above that key level. The odds of an economic recession may increase in the days and weeks ahead if energy prices remain this high indefinitely.
Will energy shortages impact inflation and spending?
Headline inflation will likely tick higher over the near term until there is more certainty that energy distribution channels will return to normal. That said, higher (and sustained) energy prices may have a disinflationary impact on other (“core”) inflation categories as consumers begin to spend less on discretionary items as more of their wallet is dedicated to non-discretionary spending. Shelter and housing-related inflation has been on a slow decline. This is expected to put downward pressure on core inflation as well. Higher tax refunds could help absorb the cost of higher energy, but only for a short period of time.
How will the Fed respond?
As was largely expected, the Fed held its policy rate steady at 3.5-3.75% in the April meeting. The Fed has communicated to the market that short-term interest rates will likely remain at current levels for now. We do not expect that the current situation will change that assessment. It is also important to remember the Fed’s focus when setting monetary policy is on core inflation — a reading that excludes food and energy.
For now, both markets and the Fed are taking a wait and see approach. There is a very low probability the Fed will lower rates given the level of uncertainty around energy prices.
How have investment recommendations changed as a result of the conflict overseas?
Market volatility is normal and typically short-lived. Volatility will decline once markets have more certainty that the energy shipping disruptions will improve. Long-term investors should not change their long-term investment strategy due to the conflict overseas. Investors that exited the market on fears of heightened volatility likely missed out on the complete reversal and new all-time highs the market has experienced over the past month.
We remind investors that market volatility arising from geopolitical events tends to be short-term in nature. Investors should maintain their long-term investment strategy, avoid panic selling and prepare for periods of heightened volatility. While it is important to monitor oil prices, as ongoing disruption to energy shipping could increase inflation, maintaining a diversified portfolio to mitigate geopolitical risk will be beneficial for investors’ long-term investment plan. Markets have shown resilience thus far, and investors tend to be rewarded by holding steady through periods of volatility such as these.
We will continue to keep you updated as facts and circumstances change. If you have questions about how to navigate this situation, please consult your Enterprise Bank & Trust Wealth Advisor.
Disclosures
Investment services offered by Enterprise Bank & Trust are not deposits, obligations, or guaranteed by the bank or its affiliates. The information provided represents the opinions of Enterprise Bank & Trust and is not intended to forecast future events or guarantee future results. Past performance does not guarantee future returns. This information is for educational purposes only. Investors should consult with their investment professionals for advice concerning their particular situation.
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