At first glance, early 2020 may seem an odd analogy for the current moment. The Iran crisis of 2026 is not a natural disaster or an accident but a deliberate act. And the economic transmission mechanism is different: while the Covid lockdowns created both a supply and demand shock, this is primarily a supply shock. But the comparison is still useful because, in both cases, markets may have recognised the event without fully pricing the second and third-order implications.
The first reason this could prove to be an early 2020 moment is simply the starting point. In both cases, this inherently stagflationary shock has arrived as markets were positioned for a Goldilocks environment. In early 2020, markets expected S&P 500 earnings to grow around 9% while interest rate markets were positioned for one cut by the end of the year. At the start of 2026, the S&P 500’s 2026 and 2027 year-on-year earnings estimates are +16%. For the ACWI, it is 17% and 14%, respectively. Meanwhile, SPY/TLT, which measures how US stocks are performing relative to longer-term bonds and is a simple measure of market expectations for future growth, is down just 5% from the February peak, while the dollar has firmed.
In other words, markets were pricing in above-trend growth, mild disinflation and a healthy backdrop for cross-asset returns despite elevated valuations.
Part of the reason for the sanguine price action is that markets have internalised the lesson of fading geopolitical shocks. Strategists are showing variants of the same table itemising previous geopolitical risk episodes and making the case that risk markets have typically ended up higher 12 months after previous such episodes. The Atlantic energy benchmarks that financial markets typically look at are also not reflecting the disruption to energy markets as much as Asian energy and product benchmarks. For instance, WTI ended last Friday (March 20) lower than the previous week, even as Singapore jet fuel rose 12% in the same period.
The second reason this could be an early-2020-type moment is that markets may be pricing the wrong policy destination (partly because they are underestimating the hit to growth). Currently, pricing transmission seems to be higher oil prices, higher headline inflation, more hawkish central banks and higher yields. That is due to some early economic data, but primarily hawkish central bank speak. Hence markets have priced in three more hikes this year in the UK, three in the eurozone, and at times have leaned toward a hike in the United States. Ultimately, we think markets are assuming a more hawkish central bank reaction function than will eventually apply.
Indeed, the initial headline inflation shock could be large, especially in Europe and Asia. In Europe, the inflation shock is likely to be around 150bp. But there is likely to be much less persistent pass-through to inflation than in the wake of the 2022 Ukraine war shock, given restrictive monetary policy and more limited pandemic-style fiscal intervention. Should worse war and energy scenarios materialise, financial conditions will tighten further, and the growth impact will ultimately be weaker. Should European central banks worry about the un-anchoring of inflation expectations, they will hike. But the combined effects of energy and terms-of-trade shocks, along with tighter financial conditions, would, in our view, push economies towards very weak growth and create medium-term downside risks to inflation.
The third reason we may be in an early 2020 moment is that the commodity shock is likely to reverberate for months in ways not captured by the Atlantic benchmarks alone. True, the oil intensity of global GDP is far lower than it was in the 1970s, but product markets are already showing the non-linear effects of the shock. Jet fuel, bunker fuel and naphtha have risen faster than crude. Nearly half of global methanol supply comes from the Gulf region and the Gulf accounts for 43% of global urea, 44% of global sulphur and 27% of global ammonia supply. Those inputs run through plastics, packaging, fertilisers, construction, chemicals and transport. Meanwhile, markets are still trying to price the impact of global plant closures or plant damage in the Persian Gulf.
Countries have already begun introducing export controls (Thailand, China), price caps (South Korea), reserve releases (IEA 32-country coordinated release), tax cuts (Vietnam, Austria), shorter workweeks (Thailand, Philippines, Pakistan, Bangladesh) and coal or nuclear restarts (Japan and South Korea). That is exactly what one would expect when a physical energy shock starts pushing governments to act. This is concentrated in Asia more than in other places because that is where energy resources that pass through Hormuz primarily flow.
The closure of the Strait of Hormuz is one of two geopolitical events that strategists have always worried about (the other being Taiwan), and the removal of 10-15% of global oil flows and 3% of global natural gas consumption is a major shock even to hitherto oversupplied energy markets. If energy product market stress persists, if more countries intensify demand-restraint measures, and if financial markets continue to treat the episode as a manageable inflation scare rather than a growth shock, then the gap between physical reality and financial pricing could close abruptly.
