How will the evolving situation in Iran affect the US stock market, gold, and crude oil? A comprehensive guide

In recent weeks, escalating tensions between the U.S. and Iran have once again prompted traders to outline potential regional developments based on risk sentiment and volatility. On Saturday, the latest reports indicated an explosion in downtown Tehran. Israel’s Defense Minister stated that Israel has launched a preventive strike against Iran.

In response, well-known macro strategist Michael Ball also analyzed the evolution of the Iran situation by referencing historical precedents.

Ball pointed out that if the U.S. takes military action against Iran, it could trigger sudden risk-averse market reactions, but this sentiment may still present trading opportunities. Such negative market sentiment would only persist long-term if oil production and shipping around the Strait of Hormuz are substantially disrupted.

Ball emphasized two key questions at present: (1) Is the U.S. aiming to accelerate negotiations or to overthrow Iran’s leadership? (2) Will any military strike be described as a one-time action or the start of a series of campaigns?

Ball first considers a scenario where the U.S. conducts limited strikes on Iran and then adopts a de-escalation stance afterward, meaning there would be no sustained disruption to regional oil production or transit through the Strait of Hormuz.

Relevant historical precedents include: the January 2020 U.S. drone strike that killed Iranian military commander Soleimani, Israel’s large-scale airstrikes during Operation Rising Lion last year, and the U.S. “Midnight Hammer” operation targeting Iran’s nuclear facilities.

In these cases, the typical market reaction pattern was: a strong risk-off impulse in the first 1-3 days—oil, gold, and the VIX spiked, and equities came under pressure. But if shipping in the region remained smooth, volatility quickly narrowed, and as oil prices eliminated event risk premiums, stocks recovered.

As shown in the chart below, these market dynamics are consistent with the response after Soleimani’s assassination.

Regarding Operation Rising Lion and Midnight Hammer, the typical market response generally occurs about a week before the initial strike—markets anticipate the action. After the first strike actually occurs, markets often reverse within a day: gold and oil prices experience a “buy the rumor, sell the fact” decline, while U.S. stocks tend to rebound after the attack.

On the impact on inflation expectations, a study by the Dallas Fed on the potential effects of the “Midnight Hammer” operation indicates that even under severe disruptions related to the Strait of Hormuz, the initial spike in oil prices is less important than the persistence of the price increase.

However, Ball also noted that if U.S. military actions aim to overthrow Iran’s leadership, it could trigger sustained risk aversion and increased cross-asset volatility. Regime change is rarely a single event; rather, it’s likely a lengthy process involving comprehensive reassessment of governance, security, and oil policies. Even in a so-called orderly transition, market sentiment would only recover once investors are convinced that future oil supplies are relatively stable.

In chaotic adjustments or prolonged conflicts, oil markets tend to become structurally more volatile because tail risks are assigned higher probabilities—not just due to supply losses causing spot prices to rise. Given that inflation data will likely rise with energy prices—even if long-term expectations remain anchored—this will complicate the stance of global central banks.

One example is the U.S. “Iraq Freedom” operation that began in March 2003 and lasted eight years. During the initial phase, oil volatility spiked; only after regime change stabilized and the global oil market adjusted (including the start of the U.S. shale revolution) did prices return to stability.

Therefore, Ball summarized that when considering the latest U.S.-Iran tensions and their market impact, the key focus will be on the path of escalation—initial strikes may reveal the likely trajectory.

If the U.S. conducts “pre-emptive” strikes on military facilities and Tehran responds with proportional retaliation, it suggests negotiations could still restart, and volatility may subside; but any major attack on Iran’s leadership would imply a longer period of uncertainty, keeping oil prices and volatility elevated.