Key Highlights

• Peace timeline uncertainty clouds risk, flows and rebalancing
• Energy curve convergence slower, inflation stickier, growth expectations softer
• Rotation from defensives toward EM and profitable cyclicals ahead

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Why Iran isn’t Ukraine or Venezuela

EXHIBIT #1: U.S. EQUITY HOLDINGS, S&P 500, VIX AND BRENT OIL 

_{Source: BNY, Bloomberg}

Peace will be harder to trade than the surprise of war. Quarter-end flows suggest investors are holding back from full rebalancing into Q2, delaying, but not denying, the potential return to “normal” markets. The most recent examples of how markets trade the shock of geopolitical conflicts – the Russian invasion of Ukraine and the U.S. action in Venezuela – show how long it takes for futures curves to converge to a new equilibrium. Truce expectations, if not an outright peace deal, now dominate market risk into April. What isn’t clear is how long this process takes, or what the global economy looks like on the other side of the energy supply shock. The rise in inflation and softening growth keep policy decisions open-ended, while political pressure to subsidize price shocks adds volatility and asset allocation risk for the year ahead. Unwinding the war trade will be the defining task for investors in the months ahead, with focus on Emerging Markets (EM), USD direction, and the rotation out of defensives into profit-seeking positions.

Our take

The move up in energy since the Iran war is on par with Ukraine but well above the more contained Venezuela conflict. The U.S. equity market reaction to Iran has been less dramatic than the Ukraine experience – a divergence that also shows up in the VIX and equity volatility curve expectations. What seems most at odds with the comparison is the shift in equity holdings and the notable shift in how investors price oil going forward. Future energy costs are expected to be higher, and the time to converge to that price is longer. The simple explanation is that this war isn’t over – but the same is true of Ukraine–Russia. For investors, comparing oil price shifts and curves against the S&P 500 and VIX highlights the energy shock risks ahead.

Forward look 

Oil prices during the first year of the Russia invasion aren’t a reliable measure for the underlying supply shift, given the distorting effect of sanctions. Market interventions then and now share some similarities – notably the release of strategic petroleum reserves – but the current supply shock is significantly more complicated and spans the full energy spectrum. Further, the U.S. equity market’s reaction to the current conflict also starts from a very different point in the cycle than Ukraine did, given the demand and fiscal stimulus that characterized that earlier period. Investors remain sanguine about U.S. stagflation risks, though perhaps less so for the rest of the world.

Peace tests the dollar’s safe-haven bid

EXHIBIT #2: PRIVATE CREDIT ETF VS. IFLOW MOOD T-BILL DEMAND INDEX

_{Source: BNY, Bloomberg}

Our take 

The USD rally during the war has been significant, contributing to the performance gap between global ex-U.S. equities and U.S. tech. Tech was a net beneficiary in the first four weeks of the Iran conflict but was not the main mover – that distinction goes to energy. The role of energy shock differs sharply between the U.S. and the rest of the world (ROW), with iFlow data showing significant flows into EMEA and EM energy sectors. Both the Magnificent Seven (Mag 7) in the U.S. and ROW indices remain well above their April 2025 “liberation day” lows – more so in the Mag 7 than the ROW top 20 – leaving plenty of room if selling resumes. How this shifts with a more certain truce will be the key signal for a risk bounce back and for the USD hedging needs that will follow. iFlow data show EM holdings have seen the sharpest reversal of any region since the war began.

Forward look 

AI and productivity will be among the themes that resurface next quarter as investors parse Q1 earnings and compare margins and hits from the energy shock. Whether the world can avoid stagflation will be read through CEO guidance on how companies are managing higher costs and uneven demand. Airlines offer a useful read-through: the longer energy prices take to converge to the forward, the more those costs translate into consumer pass-through. Airline pricing is already showing that dynamic. Fees are expected to be 20% higher into the summer, yet March bookings have surged as consumers try to get ahead of further price increases – a pattern that entrenches higher inflation expectations and leaves the Fed less room to maneuver. Whether consumers can balance higher costs with their current incomes will be the countervailing worry, as higher prices will eventually dampen demand. 

Time to rotate out of the war rotation?

EXHIBIT #3: U.S. EQUITY HOLDINGS AND FLOWS BY SECTOR, PRE-WAR VS. CURRENT

_Source: BNY

EXHIBIT #4: U.S. EQUITY HOLDINGS AND FLOWS BY SECTOR: PRE-WAR VS. CURRENT

_Source: BNY

Our take 

The equity rotation in the U.S. has driven broad-based selling, sparing only Industrials and IT. Holdings have shifted notably in Energy and Utilities, but the bigger surprise has been the shift down in Consumer Staples, Consumer Discretionary and Financials. The implication – visible in our U.S. growth factors and confirmed globally – is that recession risks are rising. How quickly a peace deal materializes will determine whether this rotational drift slows, or whether U.S. equites remain vulnerable to further downside. Further, there’s rotational confusion: Industrials have posted the largest gain, led by defense shares. The unwind of any investment flows linked to the war will remain a key focus for April.

Forward look 

Financials, Consumer Staples and Consumer Discretionary will logically shift back to trend on the back of Q1 earnings. The bigger risk may be Industrials and IT, both of which have absorbed safe-haven war flows that could unwind quickly as peace becomes more certain. The beta of the war shows up in the lack of significant shifts in how Health Care, Real Estate, Utilities and Communications move in March. The risk is a melt-up similar to prior conflict experiences, with 5% squeezes back into flows and a return to holdings running slightly above average at 2–3%. The role of rates and policy globally on this recovery will be a critical part of the march of markets into Q2 and hopes for peace.

Bottom line

Into Q2, portfolio construction should assume asymmetric risks around a truce scenario and a slower-than-expected convergence in energy curves. Prioritize resilience with barbelled exposure: maintain quality growth and cash-generative cyclicals while gradually trimming “war-premium” beneficiaries (defense-led industrials, select energy beta) into strength. Use earnings season to verify margin sensitivity to fuel and power costs; favor firms with pricing power, productivity/AI leverage, and diversified supply chains.

Reassess USD hedges: the safe-haven bid may fade as peace risk is priced, lifting ex‑U.S. winners and select EMs – the distinction between EM energy exporters and importers matters here. Peace headlines will trigger episodic 5% squeezes, so keep dry powder and maintain optionality via overlays or tactically increased volatility carry. The bigger underlying risk is policy-induced stagflation – sticky inflation plus slower growth can cap multiples even as volatility declines.

Sector stance: selectively rotate from defensives toward profitable cyclicals and high‑quality financials on earnings confirmation, while monitoring IT/industrials for flow unwind. Execution focus: scenario ladders, FX/energy hedges, and tight stop disciplines as markets transition from war to peace pricing.

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