The Effect of the Iran Conflict on Inflation and Earnings

The Iran conflict continues to evolve, and continues to impact markets with each new headline. For a brief moment, a ceasefire announcement pushed oil prices lower, with Brent crude dipping into the $90 range. That optimism proved short-lived, however, as the breakdown in negotiations sent prices back above $100 per barrel - another reminder of how quickly geopolitical dynamics can shift. For long-term investors, the key question isn’t the headlines themselves, but how these developments ultimately filter through to the broader economy, corporate fundamentals, and consumer behavior.

Historically, geopolitical conflicts tend to impact markets primarily through energy prices. Higher oil prices raise fuel costs, which can ultimately ripple across transportation, manufacturing, and ultimately consumer prices. The magnitude of that impact depends largely on how long those elevated energy costs persist. In that sense, keeping an eye on inflation trends, labor market conditions, and corporate earnings can help provide a clearer framework for interpreting today’s environment.

Energy prices are pushing headline inflation higher

The most immediate effect of the Iran conflict is showing up at the pump. The latest CPI report reflects this, with energy prices rising 12.5% year-over-year. Gasoline is up nearly 19%, and fuel oil has surged more than 40%. As a result, headline inflation has moved up to 3.3%, rekindling concerns about a broader inflation resurgence.

That said, it’s important to look beneath the surface. Core inflation, which excludes food and energy, remains much more contained, rising just 2.6% year-over-year. Strip out housing as well, and “supercore” inflation sits closer to 2.3%. In other words, while energy is clearly impacting consumers, those pressures have not yet spread meaningfully across the broader economy.

This distinction matters. Energy-driven inflation tends to be more episodic in nature, often tied to supply shocks rather than underlying demand. If oil prices remain elevated, there is a risk that higher input costs begin to work their way into goods and services more broadly. But for now, the data suggests those second-order effects remain limited.

The labor market is softening—though demographics complicate the story

Turning to employment, the latest jobs report offered a mixed picture. March payrolls came in stronger than expected, but revisions to prior data remind us how volatile these numbers can be. Stepping back, the broader trend points to slowing job growth, with monthly gains in 2025 averaging just over 20,000 - well below last year’s pace.

At the same time, the unemployment rate has remained relatively stable, hovering around 4.3%. That stability, however, is being influenced by a declining labor force participation rate, now at 61.9%. Demographics play a meaningful role here, as an aging population, particularly retiring baby boomers, reduces the number of active workers.

This creates an environment where slower job creation doesn’t necessarily translate into rising unemployment. Fewer workers means fewer jobs are needed to maintain equilibrium, making traditional labor market signals a bit harder to interpret.

Within the details, job growth has been uneven, concentrated in areas like education and healthcare, while sectors such as technology have seen layoffs. Wage growth has moderated but still outpaces inflation for many workers, providing some ongoing support for consumer spending.

Earnings remain a bright spot

Despite the crosscurrents in inflation and employment, corporate earnings have remained notably resilient. Current estimates suggest S&P 500 earnings have grown roughly 16% over the past year, with expectations for continued strength ahead.

While forecasts are always subject to change, especially given uncertainties around energy costs, tariffs, and economic growth, the underlying trend has been supportive of equity markets. Strong earnings growth, combined with recent market pullbacks, has helped improve valuations.

This is a useful reminder: periods of heightened uncertainty often create a disconnect between market sentiment and underlying fundamentals. Prices can move quickly on headlines, while earnings expectations tend to adjust more gradually.

Putting it all together

What we’re seeing today is a fairly typical pattern during geopolitical disruptions. Energy prices spike, headline inflation rises, and uncertainty increases. At the same time, the broader economy often proves more resilient than initial reactions might suggest.

For investors, the takeaway isn’t to dismiss these risks, but to contextualize them. Higher energy costs are a headwind, particularly for consumers, and a prolonged conflict could introduce additional challenges. However, stable core inflation, a still-functioning labor market, and strong earnings growth all point to an economy that remains on relatively solid footing.

As always, periods like this can feel uncomfortable - but they are also when long-term opportunities tend to emerge. Maintaining discipline, staying diversified, and focusing on underlying fundamentals rather than short-term noise continues to be the most effective approach in navigating environments like these.