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War, Inflation, Record Highs – What Could Possibly Go Wrong?
September 2, 2026
War in the Middle East, the Strait of Hormuz effectively closed, oil prices at times above $90 a barrel, rising inflation and higher financing costs. The list of reasons why investors should arguably be cautious is remarkably long at present. The equity market’s response? New record highs.
What may appear contradictory at first glance has perfectly rational explanations. Markets are becoming increasingly resilient to the geopolitical conflict between the US and Iran. New threats and military action continue to cause short-term volatility, but they no longer automatically trigger a broad-based sell-off. Investors are increasingly turning their attention back to fundamentals.
And particularly in the US, those fundamentals provide good reasons for optimism. Corporate earnings growth remains strong. S&P 500 companies were recently expected to deliver a sixth consecutive quarter of double-digit earnings growth. At the same time, the AI boom remains intact. Demand for data centres, semiconductors and the associated infrastructure remains high, driving substantial investment.
However, simply adding an AI label is no longer enough to send a share price higher. Following the enormous gains of recent months, investors are increasingly scrutinising investment volumes, financing requirements and future returns. This is leading to greater volatility in individual technology stocks while also prompting a rotation into other market segments. That is not necessarily a bad thing for the broader market. Broader participation across sectors can make a rally more resilient.
The elephant in the room – or rather, the tanker outside the strait – remains the Strait of Hormuz. A significant share of global energy trade depends on this route. News from the region therefore has a direct impact on oil prices, inflation and interest-rate expectations.
Nevertheless, there are reasons not to rule out a diplomatic solution. Despite the prolonged duration of the war, both the US and Iran have economic interests in reaching an agreement. Previous negotiations over reopening the strait show that channels of communication remain open. A lasting reopening would significantly ease pressure on energy prices and inflation and would therefore be positive for capital markets.
Of course, the risks have not disappeared. High energy prices are fuelling inflation, government debt is rising and long-term bond yields have increased significantly. At the same time, equities are hardly trading at crisis-level valuations. The bar for further gains is therefore high.
But as long as corporate earnings continue to grow, the AI investment cycle remains intact and the economy proves relatively resilient despite all the headwinds, there are equally good reasons not to fight the market.