by David Robertson, CFA
April 2026
After flatlining for most of the first two months of the year, stocks turned decidedly down in March. If not for a healthy rebound on the last day of March, it would have been a pretty ugly quarter. Bonds didn't fare much better. After perking up in late February, bonds gave back all their gains to finish the quarter nearly flat.
While performance could easily have been worse, investors were left frazzled nonetheless. The emergence of a war in Iran with no warning and day-to-day changes in narrative created a climate of unpredictability which left investors frustrated and exhausted. One headline captured the psychology: "'Numb, Overwhelmed, Petrified?' FAs Say Clients Are Anxious."
In such an environment, how can investors make sense of what is going on?
The Reality: An Escalation Trap
For starters, the war in Iran causes all kinds of problems for investors who tend to be confounded by geopolitics. Even in the best of times, investors tend to assume geopolitics away — partly as being "unpredictable" and partly as being transient. This is wrong, and it's a cop-out. There is a logic to geopolitics, and there are frameworks that make it understandable.
One of the most relevant today is Professor Robert Pape's theory of the "Escalation Trap" (https://www.youtube.com/watch?v=HrVsTTCoVeU). Pape's background in air power, political violence, social media propaganda, and terrorism make him particularly well-positioned to analyze the war in Iran.
One of the key points Pape makes is that military success is often mistakenly conflated with political success. In the case of Iran, the US military has been incredibly competent with targeting and tactics. However, that success does not automatically translate into political success. Ben Hunt ($) explains why such a disconnect can occur:
April 2026
After flatlining for most of the first two months of the year, stocks turned decidedly down in March. If not for a healthy rebound on the last day of March, it would have been a pretty ugly quarter. Bonds didn't fare much better. After perking up in late February, bonds gave back all their gains to finish the quarter nearly flat.
While performance could easily have been worse, investors were left frazzled nonetheless. The emergence of a war in Iran with no warning and day-to-day changes in narrative created a climate of unpredictability which left investors frustrated and exhausted. One headline captured the psychology: "'Numb, Overwhelmed, Petrified?' FAs Say Clients Are Anxious."
In such an environment, how can investors make sense of what is going on?
The Reality: An Escalation Trap
For starters, the war in Iran causes all kinds of problems for investors who tend to be confounded by geopolitics. Even in the best of times, investors tend to assume geopolitics away — partly as being "unpredictable" and partly as being transient. This is wrong, and it's a cop-out. There is a logic to geopolitics, and there are frameworks that make it understandable.
One of the most relevant today is Professor Robert Pape's theory of the "Escalation Trap" (https://www.youtube.com/watch?v=HrVsTTCoVeU). Pape's background in air power, political violence, social media propaganda, and terrorism make him particularly well-positioned to analyze the war in Iran.
One of the key points Pape makes is that military success is often mistakenly conflated with political success. In the case of Iran, the US military has been incredibly competent with targeting and tactics. However, that success does not automatically translate into political success. Ben Hunt ($) explains why such a disconnect can occur:
There's an old military saying... The enemy gets a vote. Meaning that no matter how badly you're beating the other guy on the battlefield, no matter how much you would sue for peace if the situation were reversed, no matter how much you believe that you have a dominant strategy that constrains the other guy's choices, there is ALWAYS a range of choices for the other guy and you do NOT have the final say on what that choice might be.
It can work for a while, this mirroring of your own raw preferences onto others, particularly if you start from a really strong position and can just steamroll the other players. But eventually you run into someone you can't steamroll. And they vote in a way that you weren't expecting. And then you lose.
Iran has voted in a way Trump didn't expect. While the bombing campaign has been extremely successful in destroying physical targets, Iran has not acquiesced. In fact, on the political realities that matter most, it has actually gained advantage. It now controls the Strait of Hormuz, which means it can extract tolls and be selective about which ships pass. The longer this continues, the more it becomes normalized. Meanwhile, its uranium supply has dispersed and there is virtually no intelligence on where it has gone — increasing the risk of radiological weapons reaching anywhere in the Middle East. For those keeping score, none of this constitutes US success.
In short, whatever threat was considered to have made the situation untenable before, the situation is much more untenable now. As Pape ($) explains, "we are approaching the decision point where it becomes much harder [for US involvement to stop]." He goes on:
In short, whatever threat was considered to have made the situation untenable before, the situation is much more untenable now. As Pape ($) explains, "we are approaching the decision point where it becomes much harder [for US involvement to stop]." He goes on:
Wars don't become uncontrollable gradually. They become uncontrollable when one side crosses into a form of escalation that changes the structure of the conflict. That threshold is ground force entry. Ground war is different. It produces sustained exposure, longer timelines, and political and military commitments that are hard to unwind.
This invites the question: what are the real signals that a ground war is coming? Pape's answer is, "Not rhetoric. Not deadlines" — but rather, logistics. The presence of thousands of Marines in theater with more on the way is a strong signal. There are several others. This is an escalation trap in real time.
Cascading Consequences
The main message from Pape and Hunt is that there is a much greater chance of severe disruption than markets, consumers, or President Trump are acknowledging.
Rory Johnston states flat out: "If the Strait of Hormuz remains closed, there is no doubt that the global price of crude oil will explode to all-time highs." The reason is that in wealthy, advanced economies, there is almost no price too high to destroy demand. Conversely, developing countries face a disastrous lifestyle adjustment.
Nearly all analyses assume the Strait will reopen and become fully functional again. This flies in the face of the fact that Iran currently controls it. Not only is it effectively closed to normal traffic, but Iran is charging tolls on selected traffic. Given the realization of its newfound power, Iran is highly unlikely to concede it without a fight.
Trump has already floated the prospect of the US simply walking away and letting others figure out the Strait. With this new reality, no country that depends on regular delivery of products from the Gulf can assume future supply will be uninterrupted. This is a defining event. From now on, everyone is going to demand larger safety stocks, greater defense capabilities, and better resilience.
In addition, every other strait in the world is now also vulnerable to the same kind of shakedown — the proof of concept has been established at Hormuz.
Disruptions should also be expected elsewhere. As John Dizard notes, it doesn't appear as if there was any planning for indirect consequences:
Cascading Consequences
The main message from Pape and Hunt is that there is a much greater chance of severe disruption than markets, consumers, or President Trump are acknowledging.
Rory Johnston states flat out: "If the Strait of Hormuz remains closed, there is no doubt that the global price of crude oil will explode to all-time highs." The reason is that in wealthy, advanced economies, there is almost no price too high to destroy demand. Conversely, developing countries face a disastrous lifestyle adjustment.
Nearly all analyses assume the Strait will reopen and become fully functional again. This flies in the face of the fact that Iran currently controls it. Not only is it effectively closed to normal traffic, but Iran is charging tolls on selected traffic. Given the realization of its newfound power, Iran is highly unlikely to concede it without a fight.
Trump has already floated the prospect of the US simply walking away and letting others figure out the Strait. With this new reality, no country that depends on regular delivery of products from the Gulf can assume future supply will be uninterrupted. This is a defining event. From now on, everyone is going to demand larger safety stocks, greater defense capabilities, and better resilience.
In addition, every other strait in the world is now also vulnerable to the same kind of shakedown — the proof of concept has been established at Hormuz.
Disruptions should also be expected elsewhere. As John Dizard notes, it doesn't appear as if there was any planning for indirect consequences:
I think that the White House or the planning team was looking solely at oil flows. They may have looked at the US's relatively good supply balance, but they didn't look at products. They didn't look at the US requirement to import sulfur, for example. For the US to produce phosphate fertilizer, it has to process its own phosphate rock with sulfuric acid. Most — around half — of traded sulfur in the world goes through the Strait of Hormuz. It's a byproduct of refining very sulfurous, or "sour," crude. Sulfur wasn't being considered as a pain point in the past. Now it is. You need sulfuric acid in order to produce copper, steel, nickel, and many other products. Apart from fertilizer, you really need it to keep an industrial society running.
As it stands, we are already in the first wave of industrial production getting throttled due to shortages of sulfuric acid. Without a clear resolution in the next couple of weeks, companies will need to start shutting down.
More regional disruptions are developing as well. Dizard points to a serious fuel supply crunch in California, given refinery closures and the state’s dependence on imported fuel from Asia. He also notes Europe is heading toward diesel rationing, jet fuel rationing, and serious shortages more broadly.
The Great Disconnect: Why Markets Aren’t Reacting -- Yet
Despite all the signs of continuing conflict and the likelihood of severe disruption, analysts and investors remain unusually sanguine. To understand why, it helps to consider some historical context.
Dating back to the Global Financial Crisis, investors have relied heavily on public figures to support financial assets. First, it was the Fed with Quantitative Easing as "the only game in town." Then it was government by way of fiscal stimulus during the pandemic. Then Treasury played a role by suppressing pressure on long-term bond yields by issuing disproportionately large amounts of short-term bills. More recently it has been President Trump regularly declaring a "golden age" for America.
In each case, large swaths of investors essentially outsourced the investment function to public authorities — and now an entire generation of analysts knows of no other way.
It is also important to realize that such policy success was much less a function of omnipotent leaders than it was the good fortune of having adequate capacity. The Fed was able to keep rates so low for so long partly because there was no practicable policy alternative from Congress and partly because there was no political opposition to it. The government was able to keep economic growth at reasonably healthy rates only by massively outspending its revenues and running its debt burden progressively higher. Both courses are rapidly running out of room.
This conditioning explains a great deal about why equity strategists remain so calm today. As Bob Elliott ($) observes, "Nearly all of them are making the same basic case that with earnings 'accelerating' and prices down, the stock market has already endured a near 20% valuation drawdown in response to the war." Such arguments seem reasonable on the surface since earnings growth is expected to be nearly 18% in both 2026 and 2027. The problem is that actual earnings are doing no such thing.
The dissonance in earnings estimates is mainly a quirk of sell-side analyst behavior. Oil industry analysts are quick to raise estimates because higher oil prices are easy to plug into models. Analysts in other industries, however, are biding their time: “if this blows over swiftly, there's no reason to update full-year estimates — that's a pain to do, so they wait with unchanged views”. As a result, it’s more accurate to say earnings estimates are stale than that they are rising.
Lessons for Investors
So there are good reasons for investors to feel anxious. The dominant narratives being told about the war in Iran significantly understate the consequences. The Trump administration does not have control of the situation, and in the absence of control, the universe of possibilities — especially negative ones — expands greatly.
There is no magic formula or silver bullet that can suddenly make everything OK. The war in Iran is likely to be longer and more consuming than people have been expecting, and its consequences are already rippling through the global economy.
This presents a double whammy for investors. It heralds the end of a halcyon era during which investors could simply follow the guidance of public officials and expect "number go up." It also reveals the disturbing reality that the price paid for perpetuating that narrative was the mortgaging of our future. In short, the best days for investment returns are behind us — at least for a long time.
The time it takes for this new reality to become widely appreciated will be a key driver of financial asset prices. A great deal of muscle memory has been developed for letting risk assets ride. For many, the fear of missing out is still greater than the fear of losing money. Many people simply don't have the bandwidth in their personal lives to draw the lines from geopolitical developments to stock returns. And there will be no small amount of denial.
But the passage of time will reveal that the odds have changed. No longer is goldilocks the baseline expectation — it is the outlier. Once again, mistakes and bad bets will have consequences, which will prove especially problematic in a highly leveraged world.
Conclusion
Investors are right to feel anxious. The dizzying pace of narrative changes combined with a wobble in stocks in the first quarter are signs of deeper issues at hand. The potential for a significant slowdown in economic growth combined with supply-side pressure on prices has risen significantly. This is simply the result of eyes-wide-open risk assessment.
In order to make the most of this new environment, investors will need to do two things they have been conditioned to eschew for the last eighteen years. One is to hold official narratives lightly at best — which probably means either doing their own homework or finding someone who is really good at it. The other is to manage risk. After nearly two decades of deferred consequences, risk management will again become a pre-eminent concern.
The new environment will be especially unkind to investors who are planning on sitting, waiting, and wishing for things to get better. Conversely, investors who embrace independent research and risk management will be able to chart a productive course forward and avoid a lot of obstacles along the way.
The silver lining is this: there are more accessible sources of quality information than there ever have been, and there is a real logic to macroeconomic and geopolitical developments that can be followed and understood. This may well mark the beginning of a golden age of investment analysis — even as it ends a golden age of simply riding the tide.
More regional disruptions are developing as well. Dizard points to a serious fuel supply crunch in California, given refinery closures and the state’s dependence on imported fuel from Asia. He also notes Europe is heading toward diesel rationing, jet fuel rationing, and serious shortages more broadly.
The Great Disconnect: Why Markets Aren’t Reacting -- Yet
Despite all the signs of continuing conflict and the likelihood of severe disruption, analysts and investors remain unusually sanguine. To understand why, it helps to consider some historical context.
Dating back to the Global Financial Crisis, investors have relied heavily on public figures to support financial assets. First, it was the Fed with Quantitative Easing as "the only game in town." Then it was government by way of fiscal stimulus during the pandemic. Then Treasury played a role by suppressing pressure on long-term bond yields by issuing disproportionately large amounts of short-term bills. More recently it has been President Trump regularly declaring a "golden age" for America.
In each case, large swaths of investors essentially outsourced the investment function to public authorities — and now an entire generation of analysts knows of no other way.
It is also important to realize that such policy success was much less a function of omnipotent leaders than it was the good fortune of having adequate capacity. The Fed was able to keep rates so low for so long partly because there was no practicable policy alternative from Congress and partly because there was no political opposition to it. The government was able to keep economic growth at reasonably healthy rates only by massively outspending its revenues and running its debt burden progressively higher. Both courses are rapidly running out of room.
This conditioning explains a great deal about why equity strategists remain so calm today. As Bob Elliott ($) observes, "Nearly all of them are making the same basic case that with earnings 'accelerating' and prices down, the stock market has already endured a near 20% valuation drawdown in response to the war." Such arguments seem reasonable on the surface since earnings growth is expected to be nearly 18% in both 2026 and 2027. The problem is that actual earnings are doing no such thing.
The dissonance in earnings estimates is mainly a quirk of sell-side analyst behavior. Oil industry analysts are quick to raise estimates because higher oil prices are easy to plug into models. Analysts in other industries, however, are biding their time: “if this blows over swiftly, there's no reason to update full-year estimates — that's a pain to do, so they wait with unchanged views”. As a result, it’s more accurate to say earnings estimates are stale than that they are rising.
Lessons for Investors
So there are good reasons for investors to feel anxious. The dominant narratives being told about the war in Iran significantly understate the consequences. The Trump administration does not have control of the situation, and in the absence of control, the universe of possibilities — especially negative ones — expands greatly.
There is no magic formula or silver bullet that can suddenly make everything OK. The war in Iran is likely to be longer and more consuming than people have been expecting, and its consequences are already rippling through the global economy.
This presents a double whammy for investors. It heralds the end of a halcyon era during which investors could simply follow the guidance of public officials and expect "number go up." It also reveals the disturbing reality that the price paid for perpetuating that narrative was the mortgaging of our future. In short, the best days for investment returns are behind us — at least for a long time.
The time it takes for this new reality to become widely appreciated will be a key driver of financial asset prices. A great deal of muscle memory has been developed for letting risk assets ride. For many, the fear of missing out is still greater than the fear of losing money. Many people simply don't have the bandwidth in their personal lives to draw the lines from geopolitical developments to stock returns. And there will be no small amount of denial.
But the passage of time will reveal that the odds have changed. No longer is goldilocks the baseline expectation — it is the outlier. Once again, mistakes and bad bets will have consequences, which will prove especially problematic in a highly leveraged world.
Conclusion
Investors are right to feel anxious. The dizzying pace of narrative changes combined with a wobble in stocks in the first quarter are signs of deeper issues at hand. The potential for a significant slowdown in economic growth combined with supply-side pressure on prices has risen significantly. This is simply the result of eyes-wide-open risk assessment.
In order to make the most of this new environment, investors will need to do two things they have been conditioned to eschew for the last eighteen years. One is to hold official narratives lightly at best — which probably means either doing their own homework or finding someone who is really good at it. The other is to manage risk. After nearly two decades of deferred consequences, risk management will again become a pre-eminent concern.
The new environment will be especially unkind to investors who are planning on sitting, waiting, and wishing for things to get better. Conversely, investors who embrace independent research and risk management will be able to chart a productive course forward and avoid a lot of obstacles along the way.
The silver lining is this: there are more accessible sources of quality information than there ever have been, and there is a real logic to macroeconomic and geopolitical developments that can be followed and understood. This may well mark the beginning of a golden age of investment analysis — even as it ends a golden age of simply riding the tide.
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