Then and now: Market reactions to military conflicts and what they mean today

In 20 major post-World War II military interventions and hostilities that we evaluated, the S&P 500 fell six percent, on average, from the initial market impact to the trough level. In 19 of the 20 events, the market took an average of only 28 days to return to where it had been prior to those events.

This happened despite some interventions lasting longer—sometimes much longer, as in years or decades. In other words, the duration of a particular conflict historically has not had much bearing on market performance.

But these are just snapshot average statistics that don’t tell the full story. As with many studies of small sample sizes, there are notable deviations.

As oil goes, so goes the stock market?

Many times, market performance after such events had unique contours, especially when energy supplies were disrupted or could have been—an issue relevant to today’s Middle East crisis that has spread well beyond Iran and Israel to the oil- and natural-gas rich Gulf Arab states.

Two events that prompted oil shocks resulted in double-digit stock market losses: the 1973 Yom Kippur War and Arab oil embargo, and in 1990 when Iraq invaded Kuwait and seized its oilfields. The S&P 500 traded down by 16.1 percent and 15.9 percent, respectively.

During the third oil shock related to a military operation—the beginning of Russia’s intervention in Ukraine—the stock market declined “only” 7.4 percent.

Nuances associated with two of those events:

• The Arab oil embargo in Oct. 1973, which lasted five months and occurred when the U.S. economy was much more dependent on oil imports than today, kicked off a lengthy recession and then a malaise period, and an inflation surge that wasn’t fully arrested until many years later. There were also fiscal policy and Federal Reserve monetary policy mistakes during this period. The S&P 500 had fits and starts, but it took six long and painful years after the onset of the Arab oil embargo for the market to return to even in 1979, and it didn’t move meaningfully higher until the 1980s. Many investors gave up and exited equities altogether in the 1970s—missing substantial market gains from the 1980s onward.
• During the early stage of Russia’s military operation in Ukraine, WTI crude oil was above $90 per barrel for six straight months in 2022, peaking at nearly $124 per barrel. We think the U.S. stock market selloff was less acute during this episode than the other two oil shock periods because it became evident that Russian crude oil supplies would not be meaningfully hindered. Also, economic and corporate earnings risks were much lower for North America than they were for Europe, in our view.

S&P 500 responses to select military interventions and hostilities since World War II

      Red circled data indicate events impacted by crude oil price spikes.

* Dates attempt to capture any material pre-event impact; actual starting dates may differ.

** Following the Arab oil embargo, other economic and monetary factors negatively influenced the number of days to get back to even; this event is not counted in the average.

Source – RBC Wealth Management, RBC Global Asset Management, National Security Archive at George Washington University, Wikipedia, U.S. Naval Institute

Economic fundamentals: Current realities and risks

Economic and corporate earnings trends are key for stock market performance over the mid and longer term, and military interventions can impact these trends in rare cases.

The good news is, heading into this Middle East crisis, our leading U.S. economic indicators were not hinting of U.S. heightened recession risks. Consumer spending, service sector and employment trends have been relatively sturdy, although there are fragilities for the latter under the surface. The fourth quarter of 2025 corporate reporting season has shown respectable earnings, revenue, and profit margin trends, and forward consensus earnings estimates have risen further.

Despite an above-average U.S. GDP growth forecast in 2026, RBC Global Asset Management assesses that the Middle East crisis has “introduced a new meaningful macro [economic] risk and, while these kinds of military actions don’t usually have lasting economic significance, we acknowledge that the range of potential outcomes for the economy and markets has widened. Iran and the Middle East are a key source of energy for the world, and should the conflict be sustained or even escalate, restrictions to oil supply and/or higher crude prices could hinder economic activity and/or weigh on investor sentiment.”

The RBC Capital Markets commodity strategy team has cautioned that in a prolonged conflict scenario, oil prices could reach above $100 per barrel, and global natural gas prices could climb to their highest since the first quarter of 2023.

For the U.S. stock market, RBC Capital Markets equity strategy team makes an important caveat about energy prices: “… the key issue is not whether there is a short-term spike in oil prices. What’s more relevant to stocks, in our opinion, is whether a sustained impact to oil prices is seen, which is what we think would have more of a potential to damage confidence at various levels.”

If a lengthy oil shock occurs and stokes inflation, large portions of the American population do not have much wiggle room to absorb it, in our assessment. Many households are still struggling with the 26 percent cumulative increase in consumer prices that has occurred since Jan. 2020, right before COVID hit.

Pullbacks are par for the course

We believe it’s prudent for investors to assume that military and geopolitical risks can push the U.S. equity market into a temporary five percent to 10 percent pullback or, in rarer cases, an even longer-lasting correction of greater magnitude.

Also, with the S&P 500 currently near its all-time high, such selloffs need to be put into perspective. While the average six percent decline of the past 20 episodes should not be dismissed, it’s well within the bounds of a typical, modest pullback in many scenarios that often confront markets—including scenarios that have nothing to do with military clashes.

Brief midyear pullbacks are common, even when the market ends up performing well for the full year. The S&P 500 declined by 10 percent or more at some point during the year in more than half of the years since 1980.

And as we’ve noted before, midterm election years often have been accompanied by market turbulence. In the 23 midterm years since 1934, the S&P 500 has experienced a noteworthy downturn with an average peak-to-trough decline of just over 20 percent—typically followed, it must be said, by a robust rebound that usually went on to set new highs.

If an investor’s current portfolio allocation to equities cannot be sustained through these types of declines and volatility episodes, then there may be a mismatch between the equity weighting and liquidity needs, risk tolerance or time horizon that should be addressed.

Plan for volatility

We recommend maintaining U.S. equities at the Market Weight level (long-term strategic allocation level) in portfolios as long as indicators are signaling that the U.S. economic expansion should persist, and S&P 500 profit growth is not materially threatened.

However, we are mindful that this Middle East crisis is highly fluid and unpredictable, and events could escalate further.

We think it’s prudent to expect and plan for some potentially unnerving market volatility this year.

For more information about crude oil and natural gas risks related to this crisis and views on the prospects for major equity and bond markets, see our recently published March Global Insight  report.

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