Morgan Stanley highlights 7 key risks for investors

According to Morgan Stanley, the duration of the conflict is the key risk factor: the longer it lasts, the greater the likelihood of broader economic and financial instability.

The U.S. bank highlights seven key points investors should keep in mind.

1. The duration of the conflict is decisive

U.S. President Donald Trump has stated that the strikes could continue for four to five weeks. A short and limited episode would likely have only modest economic effects. A prolonged conflict, however, would increase pressure on the economy through higher oil prices, rising inflation, and more volatile financial conditions.

As Monica Guerra notes, “markets can tolerate uncertainty in the short term, but a prolonged period of uncertainty is far harder to ignore.”

2. The Strait of Hormuz is a critical factor

Tensions with Iran directly affect the Strait of Hormuz, the most important maritime route for global oil trade. Roughly one-fifth of the world’s oil and liquefied natural gas consumption passes through the strait. Any disruption—or even the threat of closure—could drive fuel prices higher, boost inflation, and constrain household consumption in the United States.

3. Oil shocks quickly raise inflation

Research by Morgan Stanley estimates that a 10% increase in oil prices due to supply disruptions could raise the U.S. consumer price index by about 0.35 percentage points within three months.

A stronger U.S. dollar could offset part of the inflationary pressure, as investors often turn to the currency as a safe haven during periods of geopolitical instability. However, if the conflict becomes prolonged, the risk of higher prices remains significant.

4. Energy costs affect households with a delay

When oil prices rise due to supply disruptions, households initially pay more for fuel and often cover the difference by drawing on savings.

However, according to Sarah Wolfe, “real consumption typically begins to decline two to three months after the price shock and may remain subdued for another five to six months.” The overall impact depends largely on how long energy prices remain elevated.

5. Midterm elections could be influenced by the cost of living

Affordability is already a central issue ahead of the United States midterm elections. Supply-chain pressures and energy prices are at the forefront of public debate.

A poll conducted by Reuters and Ipsos shows that only 27% of Americans approve of the U.S. strikes. If the conflict proves brief, dissatisfaction may fade quickly. In a prolonged confrontation, however, the cost of living could remain a central political issue.

6. The Federal Reserve faces difficult choices

The Federal Reserve is likely to avoid large and abrupt interest-rate moves in the event of an energy shock. Instead, policymakers may opt for smaller adjustments or wait for new economic data.

Raising rates to combat inflation could slow growth and employment, while loosening monetary policy to support the economy could further intensify inflationary pressures.

7. Higher defense spending could widen the deficit

A deeper U.S. involvement against Iran could lead to higher defense spending, potentially approaching the president’s proposed $1.5 trillion budget, roughly 50% higher than current levels.

Such spending levels have not been seen since the Korean War. An increase of this scale would add further strain to the already high U.S. public debt and deficits, potentially pushing U.S. Treasury yields higher and weighing on equity valuations.