The start of the war against Iran by the United States and Israel was not a total surprise, given the weeks of military buildup and diplomatic stalemate. However, with the main Iranian leaders killed in the initial attacks and the regime struggling for its survival, the situation remains very unstable.
We have outlined three general scenarios.
1. CENTRAL SCENARIO: CONTAINED CONFLICT (50%)
Macro
The air campaign continues for several weeks.
Iranian military capabilities are sufficiently weakened, limiting their ability to sustain attacks in the region. However, the regime retains some military strength, also through its representatives in the region.
Political considerations incentivize the US administration to conclude the campaign before rising oil prices impact the domestic car season and, more generally, the economy.
Both parties return to the negotiating table, although results remain uncertain and geopolitical ambiguity persists.
The Strait of Hormuz reopens without significant damage to regional energy infrastructure. A residual geopolitical risk premium remains, with oil prices stabilizing around $75 per barrel, about 15% above early-year levels.
Overall inflation in advanced economies rises on average by about 0.5 percentage points after 2-3 months, with a slightly greater impact in Europe and a more moderate effect in the US. Emerging markets see a more pronounced increase of 1-2 percentage points.
Inflationary pressures prove transitory, with limited second-round effects; the impact on core inflation is less than half of the overall inflation increase.
Most central banks maintain a short-term pause but eventually proceed with previously anticipated rate cuts (particularly the Bank of England and the Federal Reserve).
Rising energy prices and increased political uncertainty exert a modest drag on global growth of about 0.2 percentage points
Asset classes
Fixed income: Yield curves remain unchanged. Some risk-aversion flows will reverse and lead to moderately higher yields across all currency markets. The rise in yields will be limited by uncertainty about labor market effects stemming from the artificial intelligence revolution and negative news from private credit markets. Credit spreads should remain stable or widen only moderately
Currencies and gold: The US dollar is expected to continue trading around current levels, with the trade-weighted DXY index fluctuating between 98 and 100 in the short term. We also expect the euro and Swiss franc to trade around current levels, while gold should be supported above $5,000 per troy ounce.
Equities: We expect volatility to remain high until risks to oil supply and the global economy subside (VIX>20). The stock market decline should be limited to about 5% from pre-air campaign levels, leaving the S&P 500 above 6,500 points. As the military campaign nears its end, markets are set to recover. Our year-end target for the S&P 500 of 7,400 points remains unchanged.
2. WORST-CASE SCENARIO: PROLONGED REGIONAL CONFLICT (25%)
Macro
Iranian military capabilities prove more resilient than initially expected.
The conflict extends regionally, involving additional actors and preventing US disengagement.
The Strait of Hormuz remains closed, with damage to energy infrastructure; oil prices exceed $100 per barrel and remain elevated for a prolonged period.
Primary inflation increases by at least 2 percentage points in most economies, accompanied by more pronounced second-round effects and rising inflation expectations.
A recession becomes likely in several economies, particularly in Europe and oil-importing emerging markets.
A stagflationary environment complicates monetary policy calibration for central banks.
The economic gap widens between net oil exporters and importers, with Europe and Japan more affected compared to the US
Asset classes
Fixed income: Yields could fall more significantly, as high oil prices and geopolitical uncertainty lead markets to price in a higher probability of recession. Credit spreads could widen significantly to account for economic weakening.
Currencies and gold: In this scenario, the US dollar should see a significant increase, with the trade-weighted DXY index surpassing 100 in the short term. The oil price surge will more significantly affect cyclical currencies, likely pushing EURUSD toward 1.15, while EURCHF could fall below 0.90, increasing the risk of foreign exchange market interventions by the SNB. In this scenario, we expect gold to rise toward $6,000 per troy ounce and will likely revise our year-end targets accordingly.
Equities: We expect increased volatility (VIX>40). The stock market will decline up to 15% (S&P 500 <6,200). Defensive and energy sectors should outperform. Net oil-importing countries will be the most affected: for example India, Korea, Japan, euro area markets. Our year-end target for the S&P 500 will likely be lowered to <7,000, as the economic fallout from the sharp oil price increase would pose a severe obstacle to earnings in 2026.
3. OPTIMISTIC SCENARIO: THE CONFLICT CALMS QUICKLY (25%)
Macro
The active conflict calms within a few weeks.
The military campaign proves highly effective in reducing Iran’s military capabilities.
Missile and drone attacks cease.
The Strait of Hormuz promptly reopens, with minimal damage to energy infrastructure.
The Iranian regime concedes on key issues, particularly nuclear and ballistic programs.
President Trump declares a strategic success and withdraws most US military resources from the region.
Oil prices quickly fall to about $65 per barrel.
– The overall macroeconomic impact remains limited
Asset classes
Fixed income: Yield curves steepen moderately, as some risk-aversion flows reverse. Ten-year bond yields will likely return to previous levels. 4.25% average yield on 10-year US Treasury bonds, 2.8% on 10-year Bunds. The rise in yields will be limited by uncertainty about labor market effects stemming from the artificial intelligence revolution and negative news from private credit markets. Credit spreads will likely tighten slightly from current levels.
Currencies and gold: The US dollar should see a renewed decline, reversing recent gains, with the trade-weighted DXY index returning around 97 in the short term. This scenario would also allow the euro to recover recent highs and ease upward pressure on the Swiss franc, while gold should return toward $5,000 per troy ounce in the short term.
Equities: Volatility is expected to decline (VIX<20). Gains in the energy sector and losses in the discretionary/airline sector should reverse the trend. The stock decline should remain very limited (the S&P 500 should stay above 6,700 points). Our year-end target for the S&P 500 of 7,400 points remains unchanged.
