Wars, tariffs, AI disruption and how to navigate them

Headline risk has once more come to the fore for investors, leading to heightened market volatility. The key themes of the recent news flow are much the same as those which dominated 2025, with physical wars, trade wars and AI disruption front and centre.

Wars

Rising tensions in the Middle East culminated this weekend with US and Israel striking Iran as President Trump's demands for a deal curbing Tehran’s nuclear programme were not met. The leader of Iran, Ayatollah Ali Khamenei and several senior key leadership figures have also been killed. US air and naval deployments in Jordan and Saudi Arabia had increased markedly of late, amounting to one of the largest build-ups in the region since the 2003 invasion of Iraq.  Iran is striking back and in a broader than expected way, targeting assets across the Middle East including Dubai in the UAE.

Given the location of this conflict and the large oil and gas productions from the region, along with the strategic transit of commodities via the Strait of Hormuz, the largest financial market impact is likely via commodity prices. Iran produces 3.2m barrels of oil per day, around 2.9% of global production. While this is not an insignificant amount it is far lower than others, for instance the 10.9m barrels per day produced by Saudi Arabia.   OPEC+ has announced it will increase production by 200,000 barrels per day, helpful but small in comparison to potential oil production at risk should the conflict target oil production directly (which would be in no one’s interests, however a war can be unpredictable).

At the time of writing the oil price is up 9% to US$79/bll (per barrel) and European gas prices initially up around 25%, having risen higher in earlier Asia trading. These moves are comparable in scale to the spike seen when the US attacked Iranian nuclear facilities in June 2025. Those moves were quickly reversed in the markets as the conflict quickly de-escalated but the latest attacks appear more likely to cause a lasting disruption.  

Largest one-day % price increases for Brent Crude Oil by close of day

The Strait of Hormuz usually see around 20% of global oil flows pass through it. Whilst Iran has not specifically mentioned it wanted to close the Strait (Iranian oil is also transported out via this channel) the targeting of tankers in the region, will see volumes completely self-limit. The much longer and more expensive routes to get oil and gas and other freight around the world will have knock on price effects. We have already seen substantial increases in insurance premiums for ships travelling through the Strait of Hormuz over the weekend and this has corresponded to a substantial drop in reported traffic. The situation is clearly dynamic and can change extremely quickly, but a one-month disruption of the Strait of Hormuz is forecast to increase oil prices in the region of US$4-US$15, depending on its degree and any associated offsetting measures.   

Although the humanitarian effects of wars can be devastating, for financial markets they rarely have a lasting adverse impact. For the Middle East, due to the small proportion of global GDP and global equities in the region, any conflict is likely to have only a fleeting impact on stock markets — like we saw with Israel-Palestine and the Russian invasion of Ukraine. Four Middle Eastern countries are in the MSCI Emerging Market index, with Saudi Arabia (2.7%) followed by the United Arab Emirates (1.5%), Qatar (0.6%) and Kuwait (0.6%)^[1].

At the time of writing the US equity futures markets is down just -1.3% and the UK market opened around 0.7% lower on Monday morning.  Meanwhile bond yields initially moved lower, as a risk-off trade, but then reversed course and are a few basis points higher on expectations of higher potential inflation impacts should oil and gas prices stay elevated for some time.  The US dollar is up 0.8% against the Euro, and the Yen is also strengthening to a lesser degree. Meanwhile gold is up 2.5% and bitcoin is flat having been down 3% over the past five days.

However should the commodity prices remain elevated for a period of time, then that will start to feed into inflation making central banks decisions even harder, at a time of slowing labour markets, and easing domestic inflation, but with higher external inflation (though of course central banks policy is much more driven by internal inflation much more than external inflation).

Today’s conflict is wider ranging than last year’s 12-day war, as Iran bombs a wider range of Middle East countries with US bases, or risk inciting the rise of insurgents in the region, in response of course to a wider bombing of Iranian targets by Israel and the US.

As a comparison, when the US bombed Iran’s nuclear development facility in June 2025, equities were unphased and bond yields dropped a little (however other things were going on like interest rate cuts). Below is a table showing equity and gilt yield moves around the June 2025 Iran strike by the US— a drop in yields equates to a rise in US treasury prices.

Commodities can be more sensitive, in particular oil when there is a supply threat from the Middle East. Brent Crude Oil had risen in recent weeks prior to this weekend's events, trading above US$70 a barrel after beginning the year in the low US$60s. Taking a step back, US$70 a barrel crude is around the mid-range for the market in the last couple of years. When the US attacked Iranian nuclear facilities in June 2025, Brent Crude Oil jumped above US$80 a barrel but the subsequent de-escalation saw a swift retreat, falling in a week to back below US$70 a barrel.

Tariffs

The US Supreme Court recently struck down the trade tariffs previously imposed by the Trump administration ruling them illegal. However, this provided only the briefest respite as the US President wasted little time in imposing a new flat tariff rate on all trading partners. The Section 122 tool used allows tariffs of up to 15% to be levied for as long as 150 days to address persistent trade deficits. The situation is fast moving, but at the time of writing Trump has implemented a 10% global levy, and is trying to increase it to 15%.

The legalities are complex and how sustainable this latest attempt proves to be is yet to be seen. What is clear is that some checks and balances remain despite Trump’s attempt to ride roughshod over them, which is a welcome development for investors. Having said that, it is also increasingly apparent that higher tariffs are here to stay, in one form or another.

The US effective tariff rate is forecast to be lowered by the change, falling from 16% before the ruling to 9.1% immediately afterwards, according to Budget Lab at Yale. If the maximum 15% global tariffs are taken into account, this rises back to an estimated 13.7%. There are winners and losers from the change in approach, simply put those countries with tariff rates previously far higher than 10% (e.g. China and Brazil) are now better off while those with previously relatively low rates (e.g. UK, Europe) have less favourable terms.

While this has dominated the news, the macroeconomic fallout is likely to be contained. Tariffs were increased by around 10 percentage points in 2025 and although this likely contributed to a modest rise in US inflation and a slight drag on economic growth the overall impact on data appears to have been far less drastic than many had feared. That said, increased friction to international trade is inflationary and may put more pressure on consumers.

On balance the recent changes could be seen as mildly positive (the effective tariff rate has fallen) but at the same time uncertainty has increased once more. While the news could be seen as something of a wash at the headline level, there are important implications at the sector and geographical level This is where diversification can provide real benefits, along with expert insight from our in-house research team.

AI disruption

Artificial Intelligence (AI) continues to be the single biggest theme in financial markets, although the reaction function of investors appears to have changed of late. After a prolonged period of strong equity returns largely based on the potentially positive transformative impact of AI, market sentiment has cooled somewhat. The second half of 2025 saw investors display increasing levels of discernment in the face of a trifecta of threats from rising capital expenditure to sales (which is being increasingly financed by debt issuance), vendor financing (the interconnected nature of business at the forefront of AI development) and high levels of market concentration.

The Mag 6 (Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia) previously attracted the lion’s share of AI-attention, but recent months have seen an increasing number of stocks and sectors impacted. This broadening out has occurred as investors begin to wonder what the AI impact will be on a wide range of stocks that had previously been considered not too exposed to the technology. This has been felt far and wide, going well beyond just the tech sector and encompassing companies from a diverse range of sectors from financials to trucking and logistics. In response we expect to see companies increasingly drawing focus on their current earnings resilience and emphasise any benefit they themselves can perceive from using AI within their own companies as well. Those that can may look to increase share buybacks following the share price declines.

For example, companies in the market‑data space — including LSEG and S&P Global — have also been drawn into the debate around AI‑driven disruption. Interestingly, LSEG delivered a robust defence alongside its earnings this week, reinforcing confidence through new medium‑term targets out to 2029 that point to consistent revenue growth and margin expansion. Strong cash generation supported a further £3.0bn share buyback, equivalent to around 7% of market cap. Management again emphasised the proprietary nature of its datasets and rising demand from new AI‑driven channels, particularly via LSEG’s Model Context Protocol (MCP).

For S&P Global, the discussion has centred more narrowly on its Market Intelligence division (around 15% of operating profit), which is viewed as more exposed to potential AI headwinds. By contrast, we see little risk around its Ratings (c.45% of operating profit) and Indices (c.20%) businesses. Ratings remains deeply embedded in regulatory frameworks, while Indices continues to benefit from more than US$27tn of assets benchmarked to S&P Dow Jones Indices — a scale and brand advantage that is difficult to replicate and provides strong insulation from disruption.

Software softness

Software stocks have been particularly sensitive to the more negative shift in sentiment, as it becomes apparent that AI is causing faster speed to knowledge (accelerating learning and information absorption) and reducing friction in information discovery. AI developments mean software is going to become increasingly an area where you can do it yourself (DIY) rather than buy ready-made solutions.

This threatens software companies’ business moats that had previously been seen as crucial in defending them from competitors. Going forward, the security of intellectual property, the uniqueness of data and the value of service, will all become more important as AI alternatives threaten to undercut existing leaders in the space. This has led to investors questioning long-term growth rates and whether more cautious assumptions should be used.

Overall, however the market is seemingly operating in a sell-now-ask-questions-later mode. Some of the sizable declines in individual stocks on apparently minor negative news developments reveals this sentiment. There has been no clear adverse impact on earnings as of yet, it is more the concern of potential negative developments going forward.    

This has led to a higher level of dispersion among stocks, with some measures putting it currently higher than it has been for 98% of the last decade. The rise of passive investing has seen stocks display high levels of correlation over the last 10 years or so, but the current environment appears to be fertile ground for stock-picking. Fundamental analysis is becoming more important to gain a deeper understanding of what fast-paced developments mean for sectors and individual stocks.  

Conclusion

The best way to manage risk in portfolios is via diversification. Smaller risks with high probabilities can be navigated somewhat via tactical asset allocation and instrument selection. However low probability events, with high impact, or unforeseeable risks get managed via multi asset diversification. Meanwhile there has yet to be an event from which markets have not recovered, World Wars, financial crises, pandemics. An investment process, with an absence of emotional reactions, coupled with an awareness of the clients’ risk profiles and time horizons is the best way to try to generate consistency of returns through time, in the face of a world with continual risks.

^[1] iShares MSCI Emerging Markets ETF | EEM

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