In the market fallout from the Iran war, US equities have held up better than their counterparts in other global regions, but that relative strength may not shield them from more severe declines should the Middle East conflict drag on.
Since the US-Israeli military strikes on Iran began in late February, the benchmark US S&P 500 index .SPX has fallen 4%. In that time, Europe's STOXX 600 .STOXX has slumped 9%, Japan's Nikkei .N225 has dropped over 12%, while an iShares ETF that tracks non-US equities ACWX.O has slumped more than 8%.
The US "can potentially absorb more economic impacts than other parts of the world can absorb. So I would expect it to outperform," said Yung-Yu Ma, chief investment strategist at PNC Financial Services Group. Still, he cautioned that "outperforming so far has meant being down... So it still can be painful."
Stocks broadly rebounded on Monday after US President Donald Trump pointed to productive conversations with Iran, illustrating the market's extreme sensitivity to developments in the Middle East.
For now, investors are pointing to several factors supporting US stocks, with a primary reason being that other regions are seen as more exposed to the war's energy price shock.
The shift to a more services-based economy away from manufacturing as well as availability of more diverse energy sources has made the US economy less reliant on oil, whose price has surged more than 30% since the crisis began. Compared to 1980, it takes 70% less oil to produce the same amount of GDP, Monica Guerra, head of policy and geopolitical strategy for Morgan Stanley Wealth Management, said in a report.
On the supply side, the US is now the world's largest oil producer and a net exporter. While about one-fifth of the world’s oil runs through the Strait of Hormuz, where ship traffic has stalled, only about 4 to 8% of US oil comes through the Strait, the BlackRock Investment Institute said in a report last week.
"At least on a supply basis, we're more insulated than other developed countries might be," said Scott Wren, senior global market strategist at Wells Fargo Investment Institute. "There's a fear out there that the supply won't be there for some of these other countries because so much of it comes out of the Persian Gulf."
HEAVY TECH PRESENCE, DOLLAR STRENGTH
Another factor is the heavier presence in US indexes of technology and tech-related shares, which are generally viewed as more immune to economic shocks. The S&P 500 tech sector .SPLRCT has declined less than 2% since the war began. Tech accounts for one-third of the S&P 500, while tech stocks represent a 16.5% weighting in the iShares ACWX equities ETF that excludes US shares, or about half as significant a presence.
Tech's "overall business model is not going to be heavily affected by swings in the oil markets," said PNC's Ma.
The strength of the US dollar, with the greenback up about 1.5% against a basket of currencies since the crisis began, is supporting the country's equities, some investors said.
"The US dollar was identified very early in this conflict as one of the hedge winners," said Nate Thooft, chief investment officer for equities and multi-asset solutions at Manulife Investment Management, whose firm pared back exposure to "non-dollar-denominated" equities shortly after the war began to guard against downside scenarios.
The recent US outperformance at least temporarily reversed a trend of international stocks running ahead since early 2025.
"There is a lot of money that has piled into the Europe trade," making it vulnerable to "de-risking," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. "The US to me is more of a safe-haven trade, and that's why it probably outperforms."
WAR END COULD RETURN SHINE TO INTERNATIONAL STOCKS
Investors are wary that the market environment in place heading into the conflict could return should the war end quickly, which might mean that international stocks resume their strength.
Ahead of the conflict, Chris Fasciano, chief market strategist at Commonwealth Financial Network, had viewed equities in some European countries as attractive because of enticing valuations and improving earnings prospects. Europe's STOXX 600 trades at about 15 times forward 12-month earnings estimates, against about 21 times for the S&P 500, according to LSEG Datastream.
"If we get a resolution in the next few weeks or months, I would still want to be positioned to own international and think that that would go back to being a good asset class to own," Fasciano said. "But it's a very fluid situation."
Higher valuations could make the US market more vulnerable if a longer war raises the risks of global "stagflation" -- a mix of high inflation and stalling economic growth that can be toxic for asset prices, said Tim Hayes, chief global strategist at Ned Davis Research.
According to a review of recent corporate commentary by strategists at RBC Capital Markets, "companies have been providing investors with additional reasons ... to see the US as relatively insulated, and we think that that reassurance has also contributed to the resiliency of the US equity market."
"Companies tend to believe a shorter-duration conflict can be managed through," RBC said in a research note on Friday, "but there are many open questions if it goes on too long."
