March 2026 War Market Analysis: Risks, Oil, and Future Outlook

Name: The Market's Narrative: How Investors are pricing in the Iran War!
Uploaded: 2026-04-01T21:35:28.921849+00:00
Duration: 19 min 29 s
Channel: Aswath Damodaran
Description: Summary and key takeaways on March 2026 War Market Analysis: Risks, Oil, and Future Outlook, covering Analyzing markets amid extreme uncertainty demands a

Aswath Damodaran

Apr 01, 2026

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19 min video

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3 min read

YouTube video ID: QID0UbRuIYk

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Analyzing markets amid extreme uncertainty demands a disciplined framework. The March 2026 war created a volatile environment where traditional signals blurred, forcing analysts to separate genuine market readjustments from panic‑driven moves.

Market Narrative vs. Prognostication

A market narrative reflects a view “with money behind it,” making it a more reliable barometer than individual expert opinions. Personal priors about political leaders or nations often skew forecasts, whereas the consensus price action embeds the collective assessment of risk and opportunity.

Oil Market Dynamics

Oil prices surged nearly 50 % in March 2026. Brent crude traded at a widening premium over WTI because the conflict’s geography constrained supply routes, especially after the Strait of Hormuz closed. Futures contracts indicate the shock is sizable but expected to fade, shifting attention from production cuts to supply‑chain fragility.

Inflation and Interest Rates

Treasury yields jumped, particularly on the 2‑year and 5‑year maturities, signaling higher inflation expectations. The yield curve steepened, and the market rejected the notion that inflation would be merely transitory. Interest‑rate moves therefore stem from anticipated inflation and real growth rather than direct central‑bank mandates.

Risk Pricing

The S&P 500 equity risk premium rose from 8.34 % to 9.07 %, while spreads on triple‑C and lower corporate bonds widened by about 6 %. Despite these increases, spreads remain modest compared with the 2008 or 2020 crises. Gold’s 10.4 % price drop further suggests the market is readjusting rather than panicking.

Regional Impacts

Global equities lost roughly 9 % of market capitalisation, equivalent to a $15 trillion decline. Oil‑importing regions such as India and parts of Asia suffered the most, while the U.S. dollar appreciated 2.6 % overall and 2.8 % against emerging‑market currencies.

Sovereign Risk

Credit‑rating agencies proved slow to react, limiting their usefulness in real‑time crisis assessment. Sovereign CDS spreads, however, responded sharply, with notable jumps in the UAE, Iraq, and Oman. The Abu Dhabi CDS rose 52 % (from 0.6 % to 0.91 %), and U.S. sovereign CDS increased by 12 %.

Future Outlook

Three critical questions will shape long‑term consequences:
1. Will capital flows from the Middle East to global assets such as AI startups and sports clubs continue, or will they contract?
2. Will regional economies prioritize resilient oil‑supply chains over “vanity projects”?
3. How will the evolving risk premiums influence investment strategies worldwide?

Mechanisms & Explanations

Equity Risk Premium (ERP) Calculation – ERP is derived as a forward‑looking implied return based on current stock prices and expected cash flows.
Market Readjustment vs. Panic – A readjustment shows moderate risk‑premium and spread increases; panic triggers extreme spikes and a flight‑to‑safety surge in gold.
Interest‑Rate Determination – Rates reflect market expectations of inflation and real growth, not solely central‑bank policy decisions.

“I’m not saying the market is right, but in many ways what you see in the market is a consensus view with money behind it.”
“This is not a crisis reaction. Stock prices were down but markets were not panicking.”
“Go where it’s darkest when there’s the most uncertainty in the midst of crisis.”

Takeaways

Oil prices jumped almost 50 % in March 2026, with Brent trading at a premium to WTI after the Strait of Hormuz closure shifted focus to supply‑chain fragility.
The S&P 500 equity risk premium rose to 9.07 %, while corporate bond spreads widened modestly, indicating a market readjustment rather than a panic.
Global equities lost about $15 trillion in market capitalisation, and the U.S. dollar strengthened by roughly 2.6 % against major currencies.
Sovereign CDS spreads proved more responsive than credit ratings, with the Abu Dhabi CDS spiking 52 % and U.S. CDS up 12 % during the crisis.
Future capital flows from the Middle East may contract as regional economies prioritize resilient oil supply chains over discretionary investments.

Frequently Asked Questions

Why is market consensus considered more reliable than expert forecasts during crises?

Market consensus reflects a view backed by actual capital, embedding collective risk assessments that individual experts lack. This money‑backed perspective filters personal biases and provides a real‑time gauge of how participants price uncertainty.

How did the closure of the Strait of Hormuz affect oil price dynamics in March 2026?

The closure forced traders to focus on supply‑chain vulnerability rather than pure production cuts, widening the Brent‑WTI premium and driving oil prices up nearly 50 %. Futures markets then signaled that the shock, while sharp, would gradually diminish.

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Helpful resources related to this video

If you want to practice or explore the concepts discussed in the video, these commonly used tools may help.

Principles Of Economics Textbook Recommended

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The Intelligent Investor Benjamin Graham

A classic book on value investing that emphasizes distinguishing between market price and intrinsic value, relevant to the speaker's discussion on market consensus and risk premiums.

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Financial Modeling And Valuation Book

Explains the mechanics of calculating equity risk premiums and discounted cash flows, which are central to the speaker's methodology.

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Global Macro Investing Strategy Book

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Full Transcript YouTube

Hi, welcome back.
One of my favorite sayings in class, one
that drives my students crazy is to go
where it's darkest when there's the most
uncertainty in the midst of of crisis. I
know it makes us feel uncomfortable. It
makes us feel offbalance, but I think we
learned the most by looking at markets
and investors at that point in time.
Well, March of 2026 clearly qualified as
a dark month. It started with questions
with a war that had started about how
long the war would last, what
consequence would have and what
permanent effects it would leave. I
would love to tell you that at the end
of the month, we had answers, but we
didn't. In fact, those questions still
remain perhaps with even more
uncertainty than at the start of the
month. So, what I'd like to do is take a
deep dive into what happened in March of
2026 across markets and see if there's
something we can learn about what to do
in the future.
Now we live in an age of
prognostications. There are experts all
over in social media and Substack know
on the in the financial press and they
have a whole range of opinions that they
presented in March of 2026. Some said
don't worry this too shall pass and
others said this is the end. You got to
sell everything. One of the thing, one
of the reasons to be a little cautious
as you read these prognostications is
this is also a word where your priors
drive what your prognostications are
going to be. What do I mean by that?
What you think about Iran and Donald
Trump will drive your endgame. So that's
is so your prior will often determine
what the what the scenario you see
playing out in this war. Now, as you try
to resolve these dueling scenarios from
different people, now I think it's easy
to get confused. So, one of the things
I'd like to do in this session is focus
on what the market narrative is. Now, I
want to emphasize that I'm not saying
the market is right, but many ways what
you see in the market is a consensus
view with money behind it. So, let's
start with the key driver through the
month. As we've gone dayto day through
the war, the the number that has best
determined what's going to happen to
markets is the oil price and oil prices
have gone up. In this graph, I have two
two measures of oil price. One is Brent
crude and the other is West Texas
Intermediate. Now, as you can notice,
Brent crude oil traded at a premium over
West Texas, but that premium increased
over the course of the month. So, while
both Brent crude and West Texas crude
increased in prices, Brent crude went up
by more. Why? because there was a
geographical component to what happened
during the course of the month. There
are two things that people worried about
at the start of the month. One was the
effect that the war will have on oil
production and that initially was the
key driver. And then midmon when the
straight of horm was closed, the worries
about supply chains and whether produced
oil could get to their destinations
became an even bigger concern. Now for
better or worse, US oil was less
affected than Brent crude by the
shutting down of the straight of moose.
So you see the difference widen but both
Brent crude and West Texas uh
intermediate went up went up by almost
50% during the course of the month. So
it was a big it was a big month in terms
of oil price shock. Now the other thing
to note also is if you look at oil price
shocks the spot price was the one that
was affected the most. And if you looked
at the futures prices, at least the
market stories seem to be there will be
an impact in oil prices, but it'll fade
over time. It's not the market's not
saying oil price will go back to where
they were before the war, but they will
not go up as much as you see in spot
prices.
What you see in this graph is a
comparison of Brent crude spot prices to
June and December prices. And to the
extent that you listen to the story the
market is telling, you can see that
while all three are going up, the
December futures are increasing a lot
less than than the spot prices are. So
the overall story that that you're
getting from the oil market is of an
increase in oil prices with disparities
across geographies, more in Europe and
Asia than in the US and more in the near
months than in future months. With that
in place, let's think about why this
plays out in the rest of the economy.
We've seen oil price shocks before. In
fact, etched into investor memories, the
1970s OPEC oil price jump shock, which
pushed up oil prices and then resulted
in double-digit inflation in the US. you
almost go back to that rule book every
time you see a jump in oil prices,
especially given the fact that in 2022
you had a reminder that it can happen
again when oil prices jumped after the
Russian invasion of Ukraine and
inflation went up. Well, during the
course of the month, it's too early to
get the actual inflation numbers to show
you, but during the course of the month,
Treasury rates reflected an an increase
in expected inflation. You know, I know
that that you know that that many people
believe that interest rates are set by
central banks. I don't. I believe that
interest rates are ultimately determined
by views on expected inflation, expected
real growth. And during the course of
the month, US treasuries reflected a
jump in expected inflation. In what way?
If you look across the maturities,
especially as you go towards two and
five year maturities, you jump in
treasury rates of about 4%. It drops off
a little bit for the 10 and the 30 year,
but the longerterm rates are all up
substantially. Now, there's a bit of
contradictory data here because the
3-month rate hardly moved during the
course of the month. This was a month in
which the yield curve became much more
upward sloping. And I think a big factor
was higher oil prices playing out as
higher inflation. So what does the
market seem to be saying that higher oil
prices will affect inflation in the
medium term pushing it up and that
inflation effect is not going to go away
quickly. It's not transitory. It's not
something that's going to be a few
months and back to where it was before
the war. Now the other effect the war
has had of course is in the fuel factor
and the place you capture is in the
price of risk and as you know I capture
that within an equity risk premium. I
reported this number midway through the
month and I'm going to finish up what I
started midway through the month by
looking at equity risk premiums for the
S&P 500 starting on February 27th going
all the way through the end of the
month. Did equity risk premiums go up?
Yes, they did. They went up by about 4%.
That's a substantial increase, but it's
not the kind of increase you often see
during a crisis. So, at least based on
the equity risk premium, this is not a
crisis reaction. Stock prices were down
but markets were not panicking. In fact,
the expected return in stocks went up
from 8.34% to 9.07%. And for those of
you familiar with how I computed, this
is a forward-looking
implied rate of return based on what
stock prices are and expected cash
flows. Half of that increase came from
the rise in the treasury bond rate and
half of it roughly came from the equity
risk premium going up. So the price of
risk go up yes but not by the magnitude
usually you've seen in times like March
2020 during CO or in 2008 during the
financial crisis at the same time and if
you looked at the corporate bond market
you started to see the impact as well
but only in the lowest rated bonds here
again if you look at the triple C and
below high yield bonds the spreads and
these are spreads over the treasury rate
went from 9.5 to 10.1% % increase of 6%
but again modest relative to previous
crisis. In fact, as you go to the lower
ratings classes, there was almost no
effect on the spread. So both the equity
market and the bond market, there was an
increase in the price of risk, but a
price but that increase was more
consistent with a market that was
readjusting than a market that was
panicking. One final indicator of of how
the market was looking at risk was to
look at collectibles. And in this graph,
I looked at the price of gold and the
price of Bitcoin during the course of
March. Now again, if you if you think
about past crisis, during crisis, when
markets panic and financial assets got
sold off, gold prices go up. March was
an unusual month. Or maybe it's a month
that reflected the fact that markets
were not panicking. Gold prices actually
dropped by 10%. Now, it's worth
remembering that gold prices came into
the month after an extraordinary year in
2025 and at all-time highs, but they
were down 10.4%.
So, if you look at the behavior of gold,
again, consistent with the narrative
that this was not a panicking market,
but a market readjusting. Incidentally,
Bitcoin did have a good month in March,
which if you look at Bitcoin's history
is, you know, if if it's not behaved
very well as a crisis as pre previous
crisis is actually good news if you
think of this as a crisis or maybe more
reflective of perhaps Bitcoin not
behaving like a crisis asset again. So,
collectively, what are we getting? That
markets are readjusting. They're seeing
more risk, but they're doing it in a
measured way. I did look across regions
because clearly this is a war that is
going to affect every country globally.
And if you look at the market cap by
region, the the best performing regions
were actually Africa and the Middle
East, oddly. And we'll talk about why
that might be in Eastern Europe and
Russia. Now, before you freak out and
say, "How can that be? This is the war
in the Middle East." Notice that there's
a recognize that there's a dual effect
from the war. One is that the near-term
effect of greater risk, greater violence
to that region and there's also the re
the effect of oil prices going up. And
if you're in the Middle East, that that
effect long-term might have a positive
impact. So maybe that explains why
you're not seeing stock prices collapse
in the Middle East and Eastern Europe
and Russia. Now if you look across the
rest of the world globally equities were
down about 9% dropping in value in terms
of market cap by roughly $15 trillion.
It was a tough year or tough month for
equities. US equities were down 8%. The
worst performing parts of the world were
you in were India and the and the parts
of Asia clearly affected more by the
fact that they're net consumers of oil
and the oil they're consuming is going
to be more expensive. But you're clearly
seeing an effect ripple across the
world. Now I usually compute equity risk
premiums by country twice every year.
Once at the end of the year and once
midyear.
I think it might be a time where I have
to make an exception and compute equity
risk premiums by country. But one other
thing that I want to look at in terms of
equity performance by region is whether
the US dollar or how the US dollar
contribute to the performance and during
the course of March the US dollar
strengthened broadly against all
currencies by an increase of about 2.6%
against emerging market currencies by
2.8%.
Now, as I said, I compute equity risk
premiums twice every year, usually
midyear and the start of the year. I
decide to compute equity risk premiums
at the start of April because I wanted
to see how the war is playing out in
equity risk premiums. I started by
reassessing my mature market premium,
which as you know, I estimate using the
S&P 500. The mature market premium has
gone up because of the crisis from 4.23%
23% at the start of the year to 4.77%.
Now that's an increase which is going to
show up across the board. I also
reassessed country risk premiums which I
compute by first looking at default
spreads based on ratings. But those
default spreads increased in the first 3
months as worries about risk mounted. So
my country risk premiums go up. I did
update ratings but there weren't too
many ratings changes in the first 3
months. But as you in this in this table
if you have if you have chance you can
check the table below you can see my
equity risk premiums by country at the
start of the month and at the at the
start of the year at the end of March of
2026 and the change over that first
quarter. Now, as you look across this
table, one of the things I want to
emphasize is when in the aftermath the
war, my country risk premiums become a
little shaky because they're dependent
on sovereign ratings. You're saying, "So
what?" Well, the ratings agencies are
slow to change the ratings. In fact, I
saw this in 2022 with Russia and Ukraine
where the ratings agencies went into,
you know, basically froze the ratings at
what they were for Ukraine and actually
withdrew the rating for Russia. I'm
still struggling with those country risk
premiums because once the ratings
disappear, the basis for building up my
equity risk premiums become shakier.
Now, in the aftermath of this crisis,
you're saying how is the Middle East
doing? Surprisingly little changed,
right? But part of the reason is the
ratings for most of the countries that
are affected by the war haven't changed.
So here for instance I'm focused in on
the region where the war is going to
have the biggest impact and is none of
the none of the countries in the region
have seen their Moody's rating change or
any of the ratings agencies change the
rating. God only knows when an actual
rating change will come. But there is
actually an alternative for many of
these many of these countries where I
went to the sovereign CDS market which
is a market-based estimate of what the
what the country risk is and I looked at
the change. If you look at Abu Dhabi at
the start of 2026 the sovereign CDS
spread for Abu Dhabi was6%
on March 31st was.91% a jump of 52%.
Bahrain went from 2.47 to 3.52%.
In fact, if you look across the region,
you'll notice the UAE, Iraq, and Oman
have seen big jumps in their sovereign
CDS spreads. Kuwait, a slightly smaller
one at 18.4%, but Saudi Arabia and
Israel have not changed very much. Now,
this could all change in a moment.
Incidentally, Turkeykey's been impacted
by the by the war as well as you see the
sovereign CDS jump. But clearly the war
has had an impact in sovereign CDS
changes. For those of you want to get um
your equity risk for for parts of the
Middle East where you feel the ratings
don't reflect country risk, you might
want to consider using these sovereign
CDS spreads. Incidentally, the US has
seen a big surge in its sovereign CDS
spread. You know, as the initiator of
this conflict, and the global CDS
spreads have increased by 12%. So, has
the war affected equity risk prints
around the world? Absolutely. And you
can see divergence start to show up. And
my guess is when I revisit these numbers
in the middle of the year, you're going
to get a much better sense of where
these equity risk settle in as a
consequence. So what now? I would love
to tell you that I have clarity on
what's coming, but I'm going to give you
the three questions that I think will
determine whether you should be
complacent and say this too shall pass
or be in full-scale panic with concerned
and terrified in the middle. The three
questions are first is how long will the
war last? It could last days, it could
last weeks, it could last months or even
longer. How much and how longlasting
will the effects be on infrastructure?
the oil infrastructure as well as the
industrial infrastructure. And that can
range from minor with a quick fix to
permanent. And what will the Middle East
look like politically and economically
after the war where you know and this
might be determined by what Iran looks
like in terms of regime and if you can
range again from the world the Middle
East will look more peaceful to more at
war. And you can already see where you
fall will depend on what your answers to
these three questions are going to be.
If you believe that this war is going to
end in days, that the infrastructure is
going to be fixed quickly, and that the
new regime in Iran, for better or worse,
is viewed as more peaceful, then you're
in good shape. You should leave things
as is, and you're going to see a pretty
good quick recovery. With the other
extreme, you think this could last
months or even years and the effect on
infrastructure is permanent and that the
new regime in Iran is going to be even
more hostile. Then I think that you
should be verging towards panic.
I know I think it behooves behooves me
to tell you where I stand. I pass
complacent very quickly. I'm not
complacent because I don't think that
this is something that will pass quickly
and be leave no effects. I I do think
the war will end in days or weeks. So
that's my view. I do think that the
infrastructure damage is um is
expensive, but it'll be fixed quickly.
So there will be money to be spent. I do
think that the regime that's going to
emerge is going to be less hostile than
the existing one, but it's not going to
be a peaceful one. So, I am more towards
the concern component than complacent of
full-scale panic. But I could very well
be wrong. There's this story is still
being written. Now, as we look at the
lasting effects of the war, no matter
where you fall in the spectrum, I do
think that there are going to be lasting
consequences for the last decade or two.
Capital from the Middle East has flowed
into the rest of the world. It's flowed
into everything from AI startups, you
know, young companies to Premier League
clubs, money being spent. I do think
you're going to see that capital flow
flow throttle no matter what how this
war acts there's going to be less supply
of risk capital coming from the middle
and that's going to have consequences
how your startup is valued might be
outpriced is going to be a little
different after this war I also think
that the Middle East will turn inward
for a while that much of that capital is
going to go back to building a more um
resilient supply chain for oil because
nothing else this war is you opened up
this reality that the supply chain is
fragile and I do think you're going to
see more money spent on fixing that
supply chain and that's to vanity
projects like building you know ski
resorts in the middle of in the middle
of the desert or state-of-the-art cities
and that might be a healthy thing it
might not be great for those people who
are making money on these vanity
projects but I think it it might be good
for the long term so I you know as I
said it's still early in the game it's
dayto-day would see how this plays out.
But I hope you found this session useful
and I thank you very much for listening.