U.S.-Israel-Iran: Market implications and response

We continue to witness significant volatility driven by Operation Epic Fury, the U.S. and Israel’s campaign to dismantle Iranian military and nuclear capabilities. Despite this turbulence, equity markets have remained surprisingly resilient. The S&P 500 has been essentially flat since October, with only a modest decline in the past couple of weeks. Bond yields have risen on fears of higher inflation, but remain within expected ranges. Credit spreads have widened, particularly in high-yield markets, but from historically tight levels.

The most notable economic impact has been on the oil market. The closure of the Strait of Hormuz — a critical chokepoint for 15 to 20% of global oil supply — has sent Brent crude prices above $100 US per barrel (pb), with spikes as high as $120 US pb and the potential to reach $150 US pb if the conflict escalates further. CIBC Asset Management’s base case is that shipping disruptions will persist for another two to three weeks, maintaining upward pressure on oil. Over the subsequent months, de-escalation is anticipated, with oil prices expected to settle in a $75 to $90 US pb range, which is higher than pre-conflict forecasts closer to $60 to $65 pb.

The conflict’s primary economic effects are threefold.

Growth impact

Higher oil prices are likely to dampen global growth, particularly in Asia and, to a lesser extent, Europe — regions most dependent on Gulf oil and gas. CIBC Asset Management estimates up to a 0.5% negative shock to global growth under its base scenario.

Distributional growth effects

The impact on GDP growth rates will likely be uneven, with Asia bearing the brunt, while North America remains relatively insulated.

Inflation

The oil shock is expected to temporarily add approximately 0.50% to global inflation.

Despite these headwinds, CIBC Asset Management’s outlook remains broadly constructive. The probability of a contained resolution to the conflict is estimated at 60%, and while vigilance is warranted, the situation does not warrant any increase in recessionary expectations — we continue to attach a probability of 30% to a global recession in the next 12 months.

CIBC Asset Management’s approach emphasizes the enduring value of diversification — across geographies, asset classes and strategies. The managed solutions portfolios, totaling over $100 billion, are diversified across more than 20 countries across developed and emerging markets, as well as across fixed income, equities and alternative assets.

Rather than reacting impulsively to short-term uncertainty, CIBC Asset Management advocates for disciplined, long-term portfolio construction. Recent increases in volatility were expected as early as January 2025, with the return of President Trump and a more aggressive, executive-order-driven policy environment. In response, CIBC Asset Management increased allocations to Low Volatility, high-yield equity strategies using systematic ETFs in Canada, the U.S. and international markets. These have delivered particularly strong performance and reduced overall portfolio risk in this environment.

On a tactical level, CIBC Asset Management’s Multi-Asset and Currency Management team has actively managed risk through hedging and option-based strategies. The focus has been on protecting downside risk while retaining the ability to participate in market rebounds. Derivative hedges have allowed for efficient risk management without excessive exposure to equity beta.

At the asset class level, fixed income teams have upgraded credit quality in portfolios and have added credit protection. Equity teams have maintained a long-term focus on themes such as central bank gold buying and diversified sector exposures. Daily cross-team investment meetings ensure that rigorous analysis of macroeconomic developments and scenario analyses inform all investment decisions.