PGIM: Ten things about Iran
5 MAR, 2026
By PGIM
By Daleep Singh, Chief Global Economist, PGIM
It is still early and much remains unknown. But enough has happened to outline the contours of the risk—and the shape of the distribution—that geopolitics and markets will have to confront in the aftermath of the war in Iran.
1/ The United States and Israel have adopted a maximalist strategy with a high-risk, high-reward targeted attack. From a tactical standpoint, it appears to have been highly successful. Reportedly, nearly fifty members of Iran’s senior leadership, including the Supreme Leader, were killed or neutralized in the first wave. Whatever happens next, there should be no doubt about the overwhelming superiority of U.S. and Israeli intelligence, surveillance, and strike capabilities.
2/ From a strategic standpoint, however, we are in a vacuum. We have heard conflicting formulations about the desired end state. Is it regime change? Creating the conditions for regime change? Or further weakening Iran’s nuclear capabilities and ammunition supply chain? These are very different objectives, with very different exit strategies and very different strategic and financial implications. If the objective lies at the most ambitious end of this spectrum, I count myself among those who are skeptical that regime change can be achieved through a limited-duration air campaign, however spectacular.
3/ In this context, all we can say with certainty is that the bands of uncertainty have widened considerably at both ends of the probability distribution. The range of plausible outcomes has expanded to include both the possibility of an exceptionally constructive resolution and that of a highly destructive one. Markets are being asked to price a much wider range of scenarios, with very little reliable information about the probability of each or the path in between.
The determining factor is whether Iran will be able to turn a localized conflict into a systemic shock, by disrupting physical energy flows or expanding the conflict horizontally through proxies, cyber operations, or attacks on regional infrastructure.
4/ To be clear, the positive scenario—a sort of “Persian renaissance”—would be unprecedented. Iran could be on the verge of replacing a brutally repressive regime that has terrorized its own people and destabilized the region for nearly half a century. The benefits would be enormous: humanitarian relief for the Iranian people, a significant reduction in the risk of regional conflict, and a substantial reshaping of the global strategic map. Removing Iran as a destabilizing force would allow the United States to concentrate resources on Asia, its primary long-term strategic challenge, while further consolidating control over global energy supply. The United States, Canada, Mexico, Venezuela, and Iran together account for roughly a third of global oil production and an even larger share of spare capacity and reserves. For markets, it is important to note that this outcome was barely conceivable just a week ago. If it materializes, it would trigger a strong rally.
5/ But achieving this appealing outcome requires a credible execution plan after the bombing ends. That means a strategy to support a peaceful transition toward a regime capable of unifying and stabilizing the country along a path of moderation. This is much easier said than done, for several reasons. First, it is doubtful that the Venezuelan model is transferable to Iran. Its governing system is more decentralized, more ideologically rooted, and explicitly designed to survive leadership decapitation. The regime has built layers of redundancy within a vast military-industrial complex precisely for this moment. Second, it is far from certain that a figure similar to Delcy would emerge from the rubble to lead a successor regime. And third, the United States’ track record in nation-building in the Middle East—or anywhere else—is mixed at best. I therefore believe the probability of a successful leadership transition does not exceed 25%.
6/ That leaves two other scenarios. The first is my base case: “We broke it, you fix it.” In this scenario, the United States and Israel succeed in toppling the current regime—there is no doubt they have the military superiority to do so—but they are politically unwilling or unable to commit the resources and assume the risks necessary to guide a durable transition. The result is a prolonged quagmire of factions involving remnants of the IRGC, elements of the regular army, and rival ethnic and regional groups.
In this scenario, the market impact we have seen so far would likely fade, as the conflict would increasingly be viewed as localized. This would be particularly true if the United States and the IEA were willing to release oil from strategic reserves and OPEC continued to increase supply as needed to prevent a sustained rise in Brent prices. Even so, such an outcome would likely exert a modest but persistent negative impulse on risk assets, as markets would still need to assess the dangers of a destabilized Iran at the doorstep of the world’s most sensitive energy chokepoint. I assign this scenario a probability of 50%.
7/ The worst outcome for financial markets is a war of attrition in which the existing regime, although decapitated, ultimately prevails—a kind of “hydra-like” resistance. In this scenario, Iran digs in, prolongs the conflict, and expands its scope. It intensifies attacks on regional neighbors, targets vulnerable civilian infrastructure, sabotages (or seriously threatens to sabotage) energy assets, activates terrorist networks abroad, and launches cyber operations to inflict asymmetric damage. All of this would aim to exhaust Washington’s political will and provoke a premature declaration of victory.
In such a context, transit through regional energy chokepoints—particularly the Strait of Hormuz, through which about 20% of globally traded oil passes—could face prolonged disruptions. Even without a physical closure, skyrocketing war-risk insurance premiums or the withdrawal of coverage could be enough to divert shipping routes and reduce effective supply. Brent could reach or exceed $100 per barrel. The market consequences would be familiar: risk-off behavior, rising interest rates, and a flight to quality, moderated—as always—by each economy’s sensitivity to higher oil prices. I assign this scenario a probability of 25%.
8/ It is worth remembering that over the past decades the global economy’s sensitivity to oil shocks has changed significantly. The United States is now the world’s largest energy producer and a net exporter. As a result, the economic effects of higher oil prices—reflected mainly in energy investment and consumption—largely offset each other, with a net impact of about ±10 basis points on GDP growth. In terms of inflation, a sustained $10 increase in Brent typically adds about 20–30 basis points to headline PCE, but only about 5–10 basis points are likely to pass through to core inflation, mainly through energy-related services.
For oil-importing economies in Europe and Asia, the risks look more like a textbook supply-side shock: higher inflation, tighter financial conditions, weaker real incomes, and slower growth, with nonlinear effects as prices rise. Conversely, oil-exporting economies—including Russia, much of the GCC, and parts of Latin America—mechanically benefit from higher prices through improved terms of trade, stronger fiscal balances, and larger external surpluses.
9/ What does this imply for central banks? The standard strategy is to “look through” supply shocks, unless inflation expectations become unstable or second-round effects (such as financial conditions or confidence) significantly weaken growth prospects. In the United States, the most likely response from Powell’s Fed would be to signal an extended pause, while other major central banks would also try to buy time, waiting to assess the duration and severity of the shock before changing course.
If the conflict were to persist and intensify, uneven exposure to energy prices across economies would lead to increasing divergence in monetary policy paths, with significant implications for currencies.
10/ In terms of long-term impact, it is important to emphasize that war is one of the bluntest tools available to policymakers, economic or military. It unleashes second-order effects that are impossible to anticipate or predict in advance, and this episode will be no exception. It also underscores that the global economy is now caught in a tug-of-war between two powerful and opposing forces: on one side, the promise of a technology-driven productivity boom—unique in a generation (or a century)—that could raise trend growth, contain inflation, and support a form of financial-market nirvana; on the other, a fragmented geopolitical landscape marked by more frequent conflicts, economic warfare, energy insecurity, rising military spending and fiscal dominance, increasing nuclear proliferation risks (to avoid Iran’s fate), and the example that “might makes right” in an outcome-based rather than rules-based order.
Which of these forces ultimately prevails is the defining macroeconomic question of our time.
