GAM: Lessons from Iran
21 MAY, 2026
By Julian Howard from GAM Investments
Imagine that on 27 February 2026 you are told that a war is about to break out in the Middle East that will effectively block the Strait of Hormuz, and that you find yourself in the privileged position not only of being certain of this, but also of being able to prepare in advance. Faced with this unique opportunity, traditional investment logic would suggest reducing equity exposure in your portfolio and increasing classic diversification instruments such as government bonds.
Incredibly, this strategy would have generated losses from the moment the bombing began until the end of April. The surprise from the decline of supposedly safe assets such as the 10-year Treasury would have been surpassed only by the sheer disbelief of seeing the S&P 500 index firmly in positive territory by the end of April, after a sharp V-shaped recovery within a few weeks.
The urgent questions investors are asking in the wake of this surprise are whether markets were in some sense “wrong” — and may now be about to revert to normal in response to events in the Middle East — or whether fundamental changes in the market landscape are challenging the traditionally assumed “power” of US Treasuries as diversifiers, while at the same time giving the S&P 500 renewed resilience.
Starting with the reaction of US Treasuries during the conflict with Iran, the yield on 10-year bonds rose from 3.9%* on the eve of the first airstrikes to 4.4%* on 4 May, while prices fell. This surprised investors who considered Treasuries to be a reliable safe haven. However, it is worth noting that yields do not automatically rise every time there is bad news in markets. Recent research¹ by AQR shows that in the 20th century they were often positively correlated with equities, and it is only in recent decades that bonds have behaved inversely to stocks (i.e. defensively) during periods of high volatility.
An inflation shock, not a growth shock (for now)
Whether Treasuries rise or fall during periods of volatility depends on whether the external shock is more growth-related or inflation-related. As AQR presciently wrote in 2022, “Inflation levels have stabilized in some markets, but uncertainty about inflation remains higher than it has been in decades.” This relatively new inflationary backdrop has likely made US Treasuries sensitive to expectations of rising prices. It is therefore unsurprising that they reacted quickly to the supply-chain shock caused by the war in Iran with higher yields (and lower prices), reflecting higher expected future inflation. A pure, non-inflationary “growth shock” would likely have played out differently and produced the expected defensive effect that has been missing in recent weeks. Yields would likely have fallen, and bond prices would have risen instead.
Economic growth, of course, could still take a hit. The latest growth forecasts from the OECD² (March) and the IMF³ (April) have not been significantly revised downward, but they do account for the possibility of a slowdown. For now, however, in the eyes of bond markets, Iran remains more of an inflation shock.
Why are US equities still rising?
Now that one mystery seems to have been resolved, it is time to move to the bigger one: how US equities have managed to post net gains since the start of the war in Iran. In particular, large-cap US equities represented by the S&P 500 — which make up more than 60% of the MSCI World All Country index — rose by +4.9%* from 27 February to 4 May. Several key factors help explain this relative resilience.
AI optimism and corporate earnings provide support
The first is the prospect of continued progress in artificial intelligence. As of 4 May, Wall Street consensus estimates for 2026 earnings growth for the tech-heavy Nasdaq 100 index now point to an increase of more than 37%* year-on-year. While it is inevitable that energy stocks benefit from oil supply constraints, the broader S&P 500 — which includes many “potential victims” of an energy shock such as consumer goods and transport stocks — is still expected to deliver earnings growth of over 20%*. Contrary to intuition, these 2026 estimates have actually risen since the start of the war.
Wars are bad, but not always for equities
The second supporting factor is historical in nature: wars have not systematically and exclusively caused US equity crashes or recessions. This may reflect America’s geographic advantage, allowing it to engage in overseas “adventures” and then withdraw without major domestic economic consequences. It is true that World War II delayed the recovery of the S&P from the 1929 crash until the early 1950s. But the Vietnam War, the First Gulf War, the Afghanistan War, and the Second Gulf War did not significantly damage either the stock market or the broader economy. The boost from innovation and the underlying economic strength of the large US domestic market has historically proven difficult to derail.
Retail investors and the “buy the dip” mentality
Perhaps the most important current support factor, however, is the army of US retail investors. Research by JPMorgan Chase⁴ has identified a structural shift in this segment of the market. For example, the share of 25-year-olds using investment accounts rose from 6% in 2015 to 37% in 2024. This has introduced a “buy-the-dip” mindset, where many investors now see bad news as an opportunity to buy rather than to sell or stay on the sidelines.
Consumers may soon feel the squeeze
For investors, the implications are multiple. First, market reactions to the war in Iran should not be a reason to radically overhaul existing portfolios. US Treasuries are currently more sensitive to inflation and may be a source of portfolio volatility. However, if the war drags on, persistent inflation will begin to weigh on economic growth as consumers are forced to spend more on energy (which is generally non-substitutable) and less on discretionary goods and services (e.g. cars and dining out). On both sides of the Atlantic, there are already stories of households making difficult trade-offs between transport and heating on the one hand, and holidays and leisure on the other. A carefully constructed allocation to government bonds could therefore still prove useful.
For equities, much depends on how these changes are interpreted — as either euphoria or deeper structural shifts. While there is an element of exuberance in recent earnings upgrades and retail investor behaviour, the shift in who participates in markets — enabled by trading apps and highly active online forums — suggests a longer-term cultural change that, if anything, supports the traditional buy-and-hold approach that has historically been so successful.
Staying invested: long-term resilience is not short-term invincibility
That said, a sharp increase in US equity allocations and a rush into markets on bad-news days may amount to tempting fate. Yes, US equities are proving resilient, but with valuations rising, volatility along the way is likely to become more frequent. For some investors, the smoothness of the journey matters almost as much as the destination. On that basis, reassessing suitability and risk appetite rather than making reactive portfolio changes may be a more sensible course of action. Done well, this can help investors stay the course through both positive and negative surprises.
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Sources:
* Bloomberg, 4 May 2026
- AQR, Q1 2023, “An Evolving Equity-Bond Correlation”
- OECD, March 2026, “Testing Resilience”, Economic Outlook Interim Report
- IMF World Economic Outlook, April 2026: “Global Economy in the Shadow of War”
- JPMorgan, August 2025, “A decade in the market: How retail investing behavior has shifted since 2015”
