WE Think: "Epic Wrath" or "Epic Mistake"? Don’t Underestimate the Impact of the U.S.–Iran War on Global Markets

Over the past month, global attention has focused on the Persian Gulf and the Strait of Hormuz. Since the U.S. and Israel launched a decapitation strike against Iran on February 28, the conflict has persisted for a month. The initial expectation was that removing Iran’s top leader would trigger internal chaos and quickly end the war. In reality, after Khamenei’s martyrdom, Iran appointed a younger, tougher, more hardline successor, resulting in greater domestic unity. Despite repeated attacks, Iran responded in an organized and efficient manner, conducting 86 counterattacks by March 29. The risk of regional spillover has increased, with Hezbollah in Lebanon and the Houthi forces in Yemen potentially joining the conflict. President Trump has released negotiation and ceasefire signals to calm markets, while simultaneously ramping up military deployments in the Middle East.

In early March, the market generally expected a quick resolution, so equities reacted mildly. As the conflict escalated, the likelihood of a short-term ceasefire diminished, oil prices began to rise, equities weakened, and liquidity pressures emerged in U.S. stocks. U.S. Treasuries and gold also saw temporary declines. By March 29, the Dow and Nasdaq had fallen 7.78% and 7.59% respectively, the CSI 300 dropped 4.42%, and the Hang Seng Index declined 6.3%. In comparison, Chinese assets showed greater resilience.

Will the U.S.–Iran conflict escalate out of control in the short term, or gradually cool down and reach a ceasefire? What are the medium- and long-term impacts on all parties and the world? How will capital markets respond, and how should investment strategies be adjusted? This edition of WE Think discusses these key questions.

“Epic Wrath” may become an “Epic Mistake”
Even if the U.S.–Iran conflict cools or pauses, disruptions to the Strait of Hormuz may persist long-term.

Even if the conflict temporarily cools or pauses, disruptions to the Strait of Hormuz may persist. This is not an isolated event, but the climax of the sixth Middle East war since October 7, 2023—a concentrated eruption of decades-long tensions between Israel and the Muslim world.

Despite the clear military superiority of the U.S. and Israel, and Iran’s severe losses—including the removal of its top leader and senior officials—Iran has endured sanctions and conflict since 1979. Its regime and society have a high tolerance for hardship. The decapitation strike failed to destroy Iran’s counterattack capability; after multiple rounds of fighting and as U.S.–Israeli air defense resources were depleted, Iran’s missile accuracy and effectiveness improved. In a war of attrition, Iran's vast size and population give it superior war resilience.

With rising oil prices, renewed inflation pressures, and growing domestic anti-war sentiment, President Trump has realized that failing to end the conflict quickly will make the upcoming midterm elections highly unfavorable.

Iran understands its advantage lies in time and resource control, and is adept at protracted warfare. It recognizes America’s political and economic vulnerabilities. Crucially, Iran holds a true “economic nuclear weapon”—by influencing and controlling the Strait of Hormuz, it can affect global energy supply and impact the world economy and U.S. voter sentiment. Iran knows that the real threat to Trump is not Iran or any external country, but American voters themselves. By maintaining pressure and preventing Trump from easily withdrawing, if the Republican Party loses control of both chambers in the November midterms, Trump could face impeachment and severe constraints on his policy agenda.

The war is difficult to end because both sides see their own chances of victory: the U.S. and Israel believe military superiority will force Iran to yield; Iran, despite severe domestic losses, feels it has nothing left to lose and that a prolonged conflict will eventually lead public opinion to oust hawkish governments. With neither side willing to compromise, a quick ceasefire is unlikely

The U.S.–Iran conflict closely resembles the Russia–Ukraine war: a major power launches a blitzkrieg against a weaker nation, underestimating its resilience, and ultimately becomes mired in a proxy war. If Trump could turn back time to February 28, he would almost certainly choose differently. This is a war launched impulsively and without adequate preparation, which may be seen as a major strategic miscalculation in hindsight.

Gains and losses for the U.S. and Israel

For Israel, direct confrontation with Iran is extremely difficult, so U.S. involvement is essential. The core strategy was to destabilize or overthrow Iran’s regime through surprise attacks and decapitation, eliminating the nuclear threat. However, neither strategic goal has been achieved; only limited facilities were destroyed and some senior officials killed. Instead, Israel has created deep, lasting enmity with Iran, sowing seeds for long-term, uncontrollable security risks.

For the U.S., the tangible benefits of participation are unclear. Even with tactical advantages, it is hard to justify the action’s value for America’s long-term interests—is it merely to reaffirm its status as the world’s top military power or to show it can strike anyone at will? In fact, the war’s effects are the opposite: before the conflict, U.S. homeland security and overseas bases were seen as unchallengeable; after the war began, Iran—a relatively small country—demonstrated sustained counterattack capability, impacting multiple U.S. bases and key facilities in the Middle East, forcing evacuations and gaining actual control of the Strait of Hormuz, which was unimaginable before the conflict.

As Iran’s parliament speaker noted, if the U.S. cannot secure its own overseas bases, its security commitments to allies and frontline troops lack credibility. This war has shaken the post-WWII myth of U.S. military deterrence and weakened the credibility of its alliance system; NATO allies’ collective hesitation during the conflict has exposed cracks in alliance stability. While America’s overall failure may not be entirely attributable to the Trump administration, future governments may attempt to correct and mitigate losses. Nonetheless, the cost of this strategic misjudgment is already substantial.

What has Iran lost and gained?

As long as Iran does not surrender, abandon its nuclear program, and continues to control the Strait of Hormuz, U.S.–Israeli battlefield victories cannot change the strategic outcome. Over time, Iran’s likelihood of acquiring nuclear weapons may actually increase, making the war’s outcome even more dangerous.

Iran has long been subject to sanctions and had limited international influence, but this war has significantly changed its status. Iran not only withstood joint attacks from the U.S. and Israel but also continued counterattacks against Israeli territory and U.S. bases, demonstrating improved military capabilities. Surviving against top adversaries is itself a victory; with rising anti-war sentiment in the U.S. and Israel, Iran’s chances of strategic success increase if it can prolong the conflict.

Iran now effectively controls the Strait of Hormuz; all vessels require its permission to pass. Although many countries are dissatisfied, few are willing to go to war over this, and instead negotiate passage arrangements with Iran. As a result, Iran’s international influence has increased significantly, potentially breaking free from its previous passive, sanctioned status.

Impacts on global order and China’s economy

In the short and medium term, oil prices and energy are the primary concerns

If the conflict cannot be resolved quickly, Gulf oil production and shipping will not recover, affecting global energy supply. The risk of rising oil prices is not fully reflected yet. The U.S. has ample energy, but inflation pressures are rising, impacting monetary policy and consumer confidence. China’s energy mix is dominated by coal, and the share of renewables is rising. With ample capacity, China’s energy supply and electricity prices remain more stable than in most other economies. The manufacturing sector’s situation is somewhat comparable to the pandemic period, with relative benefits. Southeast Asia, Europe, and Japan–Korea face greater pressure, while Russia may benefit from higher oil prices and changing European attitudes.

The likelihood of stagflation in the U.S. and Europe is increasing, while China is showing clear signs of emerging from deflation. From this perspective, China may benefit in the short and medium term from the current conflict, and potentially gain even more from the long-term international changes it triggers. The U.S.–Iran war has shaken the myth of U.S. military invincibility, prompting some countries to reassess reality and risks. If all parties recognize reality and choose rationality, China’s opportunities in the future global order and peaceful reunification may actually improve.

Investment Strategy

Negative changes in U.S. equities are reasonable. In a long-term bull market with high valuations, the market is now unresponsive to positive news but reacts sharply to negative developments. The impact of prolonged warfare may not yet be fully priced in, so a cautious approach to overseas investments remains appropriate.

In the short term, domestic capital markets will also be affected by declining investor risk appetite, especially among small and mid-cap companies. Over the past year, these firms benefited from the positive feedback of expanding quantitative products. As investors shift to a more conservative stance, new structural changes may emerge. Currently, there is no conclusion that the Chinese asset bull market is ending, but with overseas markets trending downward, volatility will increase and market structure may change. We will promptly analyze and adjust to these new dynamics.

In the face of a turbulent and uncertain external environment, the stability and predictability of China’s domestic environment and policies will become a rare global resource. For international institutions, the urgency to increase allocation to Chinese assets is becoming more apparent.

We remain optimistic about Chinese assets. Our positioning strategy is balanced but slightly aggressive, with a greater focus on the potential long-term nature of the conflict, U.S. stagflation, and the impact of China emerging from deflation.

Wu Weizhi

29 March 2026

本期《偉志思考》簡體中文版鏈接：

伟志思考：史诗怒火还是史诗错误？不要低估了这一次美伊战争的影响