RBC Capital Markets: Israel-Iran conflict poses three challenges for equity markets

• Gold price down

Amid the Israeli-Iranian conflict, equity markets appear to be showing resilience for now. European stocks were up early yesterday, Asian stocks were mixed, and futures showed the S&P 500 index had returned to the 6,000-point mark, just about 2% below its record high in February.

However, there are three ways the Middle East conflict could negatively impact equity markets, says Lori Calvasina, head of U.S. equity research at RBC Capital Markets, as quoted by marketwatch.com.

In her opinion, the first concern is the negative impact that the escalation of the conflict between Israel and Iran could have on the multiples that investors are prepared to apply to stocks. Calvasina says, "Similar to what we see with economic policy uncertainty, when national security policy uncertainty increases, the S&P 500 P/E ratio has tended to contract.” Calvasina believes this is especially important now, as S&P 500 P/E multiples didn't even get cheap during the market meltdown triggered by the U.S. tariffs announced in April and have quickly rebounded to levels well above long-term averages. The new Middle East conflict "comes at a time when stocks should be vulnerable to bad news from a valuation perspective,” the source says. The second problem, he says, is the damage that heightened geopolitical tension could do to investor, consumer and business confidence - which has recently shown signs of recovering from trade war fears. Calvasina says, "These changes in confidence, which have been stronger among investors than among consumers and small businesses, have been a key factor in the recent rally in stocks.” For example, the emerging optimism about initial public offerings, mergers and acquisitions, could fade if market volatility rises sharply. The final factor to watch is the impact that rising oil prices could have on inflationary pressures. RBC Commodity Strategies expects a significant rise in Brent crude if there is a major disruption to oil supplies in the Middle East. This could alter the Federal Reserve's inflation outlook, a concern for stocks, given that expectations of interest rate cuts later this year and in 2026 have been a source of support for the market.

• Barclays: "A new risk factor for global markets and central banks"

Barclays analysts also say that an escalation of violence between Israel and Iran presents a new risk factor for global markets and central banks, which are already grappling with trade uncertainties, reports investing.com.

The bank said the conflict could fuel inflation by pushing up oil prices and could hurt consumption and investment in general.

"The risks are still tilted to further oil price increases. So far, these attacks have had no effect on oil market fundamentals, but the risk of such an event has increased,” Barclays analysts say, noting: "While a potential separate inflation driver - US President Donald Trump's tough tariff agenda - has yet to emerge in the price data, we are hesitant to extrapolate too much from it. Most importantly, the evidence continues to suggest that cost pressures from tariffs will eventually feed through to commodity prices.”

Barclays analysts caution that new political threats from Trump or renewed geopolitical risks could emerge quickly and potentially trigger sharp swings in the US dollar, oil and gold.

• Spot gold price - above $3,415 an ounce

Gold futures fell on foreign markets yesterday as investors weighed the impact of the ongoing Israeli-Iranian conflict, while also focusing on the Group of Seven (G7) leaders' meeting and the Federal Reserve's policy decision this week.

Spot gold fell 0.5% to $3,415.36 an ounce by 08:54 GMT, after hitting its highest level since April 22 earlier in the session, according to Reuters.

U.S. gold futures for August delivery fell 0.4% to $3,438.10 an ounce on the Comex at 07:36 local time.

"Geopolitical tensions are not going away anytime soon and it is likely that interest rates will be further cut by the central bank, which should provide support for gold,” said Giovanni Staunovo, an analyst at UBS.

Gold is considered a safe haven asset during times of geopolitical and economic uncertainty. The price of the yellow metal also tends to rise in an environment with low interest rates.

It is worth noting that the price of oil also entered negative territory yesterday, after a 7% advance recorded on Friday, following the outbreak of the Israel-Iran conflict.