Two Wars, One Market: How Iran and Ukraine Could Shape U.S. Stocks Through Early 2027

The Iran war has become the most immediate geopolitical threat to U.S. equities, while the Ukraine war continues to reinforce pressure through refined fuels, food, sanctions and defense spending. The central question for investors is no longer whether war produces volatility. It is whether the combined disruptions keep inflation and interest rates high enough to overpower an otherwise strong corporate earnings cycle.

Market Scope Digest
Published September 4, 2026
Research current through September 4, 2026

The United States stock market is entering the final quarter of 2026 with two conflicting forces pulling against each other. On one side, corporate earnings remain exceptionally strong, artificial-intelligence investment continues to support technology spending, and the S&P 500 entered September roughly 13% to 14% above where it began the year. On the other side, the wars involving Iran and Ukraine are keeping energy markets unstable, reviving inflation concerns and pushing bond yields high enough to challenge stock valuations. The result is not a simple wartime bear market. It is a market in which earnings provide a strong floor, but geopolitics places a ceiling on how much investors are willing to pay for those earnings.

The two wars do not carry equal weight for Wall Street. Iran is the greater immediate danger because the conflict reaches directly into the Strait of Hormuz, one of the most important energy corridors in the world. Disruption there can affect crude oil, diesel, liquefied natural gas, shipping insurance, freight costs and inflation across the global economy. Ukraine represents a slower, more persistent pressure. Attacks on Russian refineries, restrictions on Russian fuel exports, disruption of Black Sea grain shipments, additional sanctions and the continuing need to replenish Western weapons stockpiles all influence particular industries. Iran can move the entire U.S. market quickly. Ukraine is more likely to reinforce trends already underway and sustain them into 2027.

Our base-case assessment is that these wars will produce a volatile and unusually selective stock market through the fourth quarter, but they will not automatically cause a broad market collapse. Energy producers, refiners, defense suppliers and certain industrial companies should retain relative strength. Airlines, trucking companies, rate-sensitive small businesses and weaker consumer companies face the greatest pressure. The principal threat is not another hostile statement or isolated attack. The real danger is a simultaneous deterioration in Hormuz and Russian refined-fuel supplies that keeps oil, diesel and Treasury yields elevated long enough to force widespread reductions in corporate earnings estimates.

The Real Transmission Mechanism Is Inflation and Interest Rates

Wars affect the stock market through many channels, but the most important sequence in late 2026 begins with physical supply. Disrupted shipping and damaged energy infrastructure lift crude oil and refined-product prices. Those higher costs spread through trucking, aviation, agriculture, construction, manufacturing and retail distribution. Businesses attempt to pass the increases to customers, household purchasing power weakens, inflation expectations rise and bond investors demand higher yields. The Federal Reserve then has less freedom to lower rates and may be forced to tighten policy further. That final step—the effect on interest rates and stock valuations—is how a regional conflict becomes a market-wide event.

Conditions in the Strait of Hormuz illustrate the scale of the problem. Reuters reported that only four commodity vessels crossed the strait on September 3, compared with a ten-day average of fifteen and approximately 125 commercial vessels per day before the war.[1] Some oil continues to move, but reduced traffic, rerouting, uncertain payment arrangements and sharply higher war-risk insurance all add a premium to delivered energy costs. Earlier in the conflict, the insurance premium on a large tanker reportedly increased from approximately 0.25% of the vessel's value to around 3%. That change can turn a charge of several hundred thousand dollars into a multimillion-dollar expense for a single voyage.[2]

Diesel is the most important warning signal for the broader economy because it is embedded in almost every physical supply chain. The U.S. average reached a record $5.820 per gallon on September 3, approximately 55% above its level when the Iran war began, while East Coast inventories stood at a record low.[3] High diesel prices raise the cost of moving food, packages, building materials and manufactured goods. Larger companies may eventually recover part of the expense through fuel surcharges, but smaller carriers and retailers generally have less pricing power. Even when the consumer never purchases diesel directly, the cost arrives in the prices charged for nearly everything transported by truck.

The inflation data already show the effect. The Federal Reserve's July Monetary Policy Report identified conflict-driven energy prices as a major reason headline personal-consumption-expenditure inflation reached 4.1% in May, with core inflation at 3.4%.[4] Inflation moderated somewhat by July, but headline PCE remained at 3.7% and core PCE at 3.3%. Real consumer spending was essentially flat for the month.[5] July consumer-price data showed the same pattern, with overall inflation at 3.4% and energy prices 14.7% above the prior year.[6] At the same time, the labor market remained firm enough to deny investors an easy path to lower rates. August payrolls increased by 162,000, unemployment held at 4.1%, and the ten-year Treasury yield moved toward 4.8% as the market increased the probability of another Federal Reserve rate increase.[7]

This is why the wars matter most when their effects persist. A one-day oil spike can reverse without permanently harming the market. Several months of expensive diesel, elevated freight costs and renewed inflation can change Federal Reserve policy and the discount rate investors apply to every future dollar of corporate earnings. Higher rates also fall disproportionately on smaller companies, homebuilders, commercial real estate and consumers who must refinance or borrow. Cash-rich technology leaders can absorb those conditions longer than weaker companies, but even the largest growth stocks become vulnerable when Treasury yields rise far enough.

Iran Is the Dominant Fourth-Quarter Market Risk

The Iran war is the principal swing factor for the fourth quarter because it can change global energy expectations almost immediately. Market reactions during 2026 provide unusually clear evidence. When a preliminary Iran agreement appeared in June and oil prices fell, the Nasdaq gained approximately 3% and the Dow reached a record.[8] When that agreement later broke down, crude rose more than 5% and industrial and materials shares fell sharply.[9] Airlines responded in the same direction, suffering heavy losses when crude exceeded $105 and rebounding when oil retreated toward its prewar level.[10] Those reactions occurred under the same earnings, interest-rate and valuation conditions investors face today, making them more useful than distant historical comparisons.

The Energy Information Administration's August forecast called for Brent crude near $78 per barrel in the fourth quarter and an average of $69 during 2027, based on substantial restoration of disrupted production in early 2027.[11] That forecast remains a useful normalization case, but renewed U.S.-Iran exchanges and the latest shipping data make it too optimistic to serve as the only outlook. Market Scope Digest expects a wider and higher fourth-quarter range unless reliable transit, insurance and payment mechanisms return to Hormuz. It is not necessary for every barrel to be physically blocked for the market to remain under pressure. Uncertainty itself raises the cost of moving energy and reduces the willingness of refiners, shippers and customers to operate normally.

The war also reaches the market through federal spending and Treasury borrowing. The Pentagon estimated in July that the conflict had already cost the United States $37.5 billion, with substantially more funding requested.[12] That spending supports defense production, but it also adds to federal financing requirements at a time when the bond market is already demanding high yields. Defense stocks therefore should not be viewed as an automatic hedge against every negative market outcome. Companies with funded contracts, expanding production capacity and visible backlog conversion can benefit, while contractors trading at aggressive valuations remain exposed to the same interest-rate pressure affecting the rest of the market.

Ukraine Is a Persistent Reinforcing Shock

The Ukraine war is still highly consequential, but markets have had years to adjust to the original invasion and Europe's natural-gas shock. Its present influence on American equities is more concentrated in refined fuels, food, sanctions and defense procurement. Ukrainian attacks have damaged Russian refineries and idled capacity, while Russia extended restrictions on diesel exports through September with the possibility of continuing them longer.[13] This distinction matters because crude supply and refined-fuel supply are not interchangeable. The world can possess adequate crude oil and still experience serious shortages of diesel, gasoline and jet fuel when refinery capacity is damaged or offline.

Iran and Ukraine therefore interact most powerfully in the refined-product market. Hormuz raises the price and risk attached to crude feedstock and maritime shipping, while attacks on Russian refineries reduce the supply of finished fuel available to replace disrupted barrels. Seasonal refinery maintenance in the United States adds another constraint during the autumn. The Energy Information Administration expects Russian product disruptions, Hormuz restrictions and maintenance shutdowns to support American refining margins through the end of the year.[14] This creates a favorable operating environment for well-positioned refiners but a difficult one for transportation companies and consumers.

Black Sea grain shipments provide another inflation channel. Ukrainian agricultural exports fell sharply during August as the blockade trapped part of the harvest.[15] The effect on American grocery prices is neither direct nor immediate, but lower export availability can lift global grain benchmarks and increase feed, fertilizer and transportation costs. Energy and food inflation arriving together would make the final stage of disinflation much more difficult and reduce real household purchasing power. That would place additional strain on restaurants, discount retailers and other businesses serving financially pressured consumers.

Defense production is the clearest positive equity channel from Ukraine. NATO allies committed substantial support for 2026 and at least an equivalent level for 2027.[16] RTX reported a defense backlog of $119 billion at the end of June, up from $107 billion at year-end, while Raytheon recorded approximately $20 billion in second-quarter bookings.[17] The opportunity is not simply that war exists. The durable investment case rests on funded orders, replenishment needs and multiyear expansion in missiles, interceptors, propulsion, radar, drones, electronic warfare, shipbuilding and secure communications. Early in the Iran conflict, defense stocks surged before analysts had materially increased profit estimates. Later gains were better supported by actual restocking demand. That difference argues for selectivity rather than buying every contractor following a headline.

Diplomacy could reduce the Ukraine risk premium, but there was no durable settlement as of September 4. Negotiations were being discussed for September while territorial disputes and battlefield operations continued.[18] A credible ceasefire would help European energy markets and reduce some food and trade uncertainty, but it would not instantly remove sanctions, repair refineries, reopen every shipping route or eliminate weapons-replenishment orders. For U.S. stocks, progress in Ukraine would be positive, although the immediate market reaction would probably be smaller than the response to a verified normalization of Hormuz.

Strong Earnings Are Protecting the Market, but Valuations Offer Little Cushion

The strongest argument against an immediate bear market is corporate profitability. FactSet reported that S&P 500 earnings increased 52% in the second quarter, with 86% of companies exceeding estimates. Even after removing Alphabet and Amazon, earnings growth was 33.8%. Analysts expected growth of 28.2% for the third quarter and 25.8% for the fourth.[19] Those numbers provide a substantial earnings floor. Artificial-intelligence infrastructure, cloud demand, financial-sector profits and stronger energy earnings can keep aggregate results advancing even when households and fuel-sensitive businesses are under pressure.

The weakness is valuation. The S&P 500 traded at approximately 19.6 times forward earnings, slightly above its ten-year average of 19.0.[19] That is not an extreme valuation when profits are advancing rapidly, but it leaves limited protection if bond yields climb. A Reuters survey conducted before the latest September escalation produced a median year-end 2026 S&P 500 target of 7,900 and a year-end 2027 target of 8,475.[20] With the index near 7,748 at the September 3 close, the median 2026 forecast offered relatively little remaining upside. The market needs continued earnings delivery and some stability in energy prices and bond yields to advance materially.

Investor positioning has already become more defensive. U.S. equity funds recorded $11.12 billion in outflows during the week ended September 2, including withdrawals from small-cap, technology, financial and industrial funds. Money-market funds attracted substantial new cash during the same period.[21] That shift does not establish that a bear market has begun. It does show that investors are demanding greater compensation for geopolitical and interest-rate risk. It also creates potential fuel for a rally if physical conditions improve, because cash can return quickly when uncertainty declines.

Market Scope Digest Outlook for the Fourth Quarter of 2026

Our base case carries a 55% probability and assumes that Hormuz remains constrained but gradually improves, direct U.S.-Iran exchanges remain intermittent and the Ukraine war continues without a decisive settlement. Under this outcome, Brent crude would likely trade primarily between $85 and $100 during the fourth quarter, with the S&P 500 fluctuating between approximately 7,450 and 8,050. The market would remain volatile, but strong earnings would prevent a sustained breakdown. Leadership would stay relatively narrow, and the difference between winning and losing sectors would matter more than the movement of the index itself.

The constructive case carries a 25% probability. It requires a credible operating agreement that restores dependable Hormuz traffic and reduces the insurance and freight premium, combined with meaningful progress toward a Ukraine ceasefire. Brent could then move toward the $65 to $80 range, allowing inflation expectations and Treasury yields to decline. The S&P 500 could finish the fourth quarter between approximately 8,050 and 8,400 before advancing toward 8,250 to 8,700 during the first quarter of 2027. The most important feature of this scenario would be broader participation. Airlines, trucking companies, retailers, housing-sensitive shares, small-cap stocks and cyclical industries would have greater operating leverage to falling fuel and financing costs than the sectors that already led the market higher.

The escalation case carries a 20% probability and represents the principal threat to portfolios. It would involve a serious deterioration in Hormuz transit or attacks on Gulf energy infrastructure occurring at the same time that Russian fuel exports or refining capacity worsen. Brent could move above $110, diesel could remain near extreme levels, inflation would stay elevated and the ten-year Treasury yield could move decisively above 5%. Under those conditions, the Federal Reserve could tighten policy or postpone any relief, and companies would begin reducing earnings forecasts. The S&P 500 could fall into the 6,700 to 7,350 range during the fourth quarter and trade between approximately 6,500 and 7,400 during the first quarter. That would represent a correction of roughly 10% to 15% from the early-September reference level rather than an assumption of financial-system failure.

Where the Opportunities and Pressure Points Are Developing

Energy producers and refiners possess the clearest positive earnings sensitivity. Producers benefit from higher realized crude and natural-gas prices, while refiners benefit when shortages widen the spread between their crude inputs and the gasoline, diesel or jet fuel they sell. The better opportunities are companies with reliable production, complex refining systems, manageable debt and the ability to return cash to shareholders. Highly leveraged energy companies can rise rapidly during an oil spike, but they remain vulnerable if diplomacy suddenly removes the war premium.

Defense and munitions suppliers have a multiyear demand tailwind from Ukraine, Iran and the need to rebuild depleted Western stockpiles. The most direct exposure lies in missile defense, interceptors, propulsion, radar, drones, electronic warfare, naval construction and secure communications. Investors should focus on funded backlogs and production expansion rather than political statements alone. The strongest companies will be those capable of turning government commitments into rising deliveries, cash flow and margins.

Airlines, trucking, parcel delivery and consumer-discretionary businesses remain the clearest pressure points. Jet fuel and diesel compress margins, while higher gasoline and grocery bills redirect household income away from optional purchases. Larger carriers and logistics companies can use surcharges to recover part of their costs, although the adjustment occurs with a delay and may reduce demand. Smaller transportation firms and retailers generally have less pricing power and greater refinancing exposure. Businesses dependent simultaneously on cheap fuel, low interest rates and a financially comfortable consumer are the most vulnerable combination in the present market.

Mega-cap technology remains supported by earnings and AI investment, but it is not completely insulated. Long-duration growth valuations remain sensitive to Treasury yields, and higher electricity and equipment costs can affect the economics of data centers and other infrastructure. Companies generating substantial current free cash flow should hold up better than speculative growth companies whose value depends on earnings many years in the future. Banks present a mixed picture: higher long-term yields can increase income on assets, but weaker borrowers, volatile funding costs and credit losses can offset that benefit. Small banks and rate-sensitive real estate remain especially exposed if financing costs stay elevated.

The Indicators That Will Decide the Market

Physical shipping data should be watched more closely than diplomatic language. A sustained recovery in Hormuz vessel counts, falling war-risk insurance and normal tanker scheduling would validate the constructive scenario. Continued low traffic would indicate that the energy premium remains justified. U.S. diesel below approximately $4.75 per gallon would signal easing supply-chain pressure, while prices above $6 would point toward a much more serious margin and consumer shock. Brent crude below $80 would support renewed disinflation. Sustained prices above $105 would force the market to account for weaker growth and more restrictive monetary policy.

The ten-year Treasury yield is the bridge between geopolitical disruption and the broad stock market. A yield below 4.5% would allow strong earnings to support higher valuations and broader participation. Between 4.5% and 5%, sector selection is likely to matter more than index direction. A sustained move above 5% would threaten housing, small-company refinancing and long-duration growth stocks. Earnings revisions are the final confirmation. If expected fourth-quarter S&P 500 profit growth remains above 20% and 2027 estimates hold, pullbacks are more likely to be corrections within an ongoing earnings expansion. If analysts begin cutting estimates across transportation, consumer, industrial and technology sectors simultaneously, the escalation case would be gaining credibility.

For Ukraine, the most useful indicators are Russian diesel exports, verified refinery operating rates, Black Sea grain loadings and the actual structure of any negotiations. A ceasefire announcement without enforcement terms, sanctions provisions and shipping normalization would have less market value than the headline might suggest. For Iran, observable maritime normalization is the standard. Safe commercial traffic and lower insurance costs matter more than public declarations from any government.

The Bottom Line

Going into the final quarter of 2026, the wars argue for a selective portfolio rather than an indiscriminate retreat from stocks. One side of the market favors companies with strong cash flow, low refinancing needs and durable earnings. The other favors direct beneficiaries of scarce energy, valuable refining capacity and funded defense replenishment. The weakest businesses are those that require cheap fuel, low interest rates and strong discretionary consumer spending at the same time.

The S&P 500's earnings engine remains powerful, but the Iran war has removed the easy disinflation story that would normally allow those earnings to receive a higher valuation. Ukraine reinforces the pressure through refined fuels, food and defense demand. If Hormuz normalizes, strong earnings and the large amount of defensive cash can push stocks higher and broaden the rally. If the wars tighten crude and fuel markets at the same time, interest rates—not battlefield fear alone—will transmit the damage across nearly every sector.

Market Scope Digest remains constructive on earnings but guarded on the broad index. The most likely outcome is continued volatility, sharp sector rotation and only modest market progress through year-end, followed by improving conditions in the first quarter of 2027 if energy production, shipping and diesel inventories normalize. The bullish case requires physical improvement in Hormuz. The bearish case requires a lasting oil-and-products shock severe enough to force the Federal Reserve to place inflation control ahead of market support.

Research Sources

1. Reuters, “Gulf shipping traffic via Hormuz keeps below 10-day average,” September 4, 2026.

2. Reuters, report on maritime war-risk insurance premiums, March 6, 2026.

3. Reuters, “U.S. diesel hits record $5.820 a gallon,” September 3, 2026.

4. Board of Governors of the Federal Reserve System, Monetary Policy Report, July 2026.

5. U.S. Bureau of Economic Analysis, Personal Income and Outlays, July 2026.

6. U.S. Bureau of Labor Statistics, Consumer Price Index, July 2026.

7. U.S. Bureau of Labor Statistics, Employment Situation, August 2026; Reuters, September 4, 2026.

8. Reuters, market report on the preliminary Iran agreement and U.S. equity rally, June 15, 2026.

9. Reuters, market report on the breakdown of the Iran agreement, July 8, 2026.

10. Reuters, airline and energy-price market reports, March 9 and June 24, 2026.

11. U.S. Energy Information Administration, Short-Term Energy Outlook: Global Oil Markets, August 2026.

12. Reuters, report on the estimated U.S. cost of the Iran war, July 21, 2026.

13. Reuters, “Russia to extend diesel export ban through September,” August 25, 2026.

14. U.S. Energy Information Administration, Short-Term Energy Outlook: Petroleum Products, August 2026.

15. Reuters, report on Ukraine's Black Sea grain exports, August 13, 2026.

16. NATO, Relations with Ukraine, 2026.

17. Reuters, U.S. defense-industry reports, April 2 and July 23, 2026; RTX second-quarter 2026 Form 10-Q.

18. Reuters, report on possible September Russia-Ukraine talks, August 27, 2026.

19. FactSet, Earnings Insight, August 28, 2026.

20. Reuters, S&P 500 strategist poll, August 26, 2026.

21. Reuters, “U.S. equity funds record second weekly outflow on Iran tensions, high yields,” September 4, 2026.

All forecasts, market ranges and scenario probabilities are Market Scope Digest judgments based on information available through September 4, 2026. This publication provides general market research and is not individualized investment advice.