After a remarkable year of performance in 2025, international stock markets have faced a significant downturn since the beginning of the Iran war, prompting investors to flock towards US assets. In a striking reversal, US equities, bolstered by confidence in the American economy and energy independence, have regained dominance over their international counterparts.
Leading up to 2025, international markets had recorded a stellar performance, with the Morningstar Global Markets ex-US Index rising by 28.3%, surpassing the US market’s gain of 15.9%. Specific indices, such as the Morningstar Europe Index and the Asia Pacific Index, reported increases of 31.8% and 24.3%, respectively. Emerging markets, including Brazil, Russia, India, and China, also showed promising returns with a 26.5% rise. This period of international outperformance was attributed to heightened valuations of large-cap US stocks, particularly in the technology sector, leading many investors to seek more attractively priced overseas opportunities as well as benefiting from a weaker US dollar.
However, since the outbreak of the Iran conflict on February 28, US stocks have exhibited resilience, outperforming international markets as they experienced declines of 2.8% in comparison to an 8.0% drop in the Global Markets ex-US Index. This shift is partially driven by the US dollar gaining strength as investors prioritize the safety associated with USD-denominated assets amid global turmoil.
The notion of US energy independence has further amplified investor confidence, with the belief that the US is less vulnerable to volatility in Middle Eastern oil supplies. In stark contrast, European and Asian markets, which are still heavily reliant on oil reserves from the region, have seen significant losses, resulting in a decline of 8.06% for the Europe Index and 8.51% for the Asia Pacific Index since the war’s commencement.
Investment strategies are quickly adapting in response to the evolving geopolitical landscape. As investors assess the severe economic fallout from the conflict, emerging markets like South Korea and South Africa have seen their stock markets decline approximately 14%, while Mexico’s market has dropped 10.5%. The Canada Index has similarly lost 4.6%. Meanwhile, the China Index has remained somewhat resilient, only marginally down by about 2%.
While US share prices remain elevated following their earlier performance, a number of international stock markets have encountered valuation declines. Companies in the tech sector, which had shown strong earnings growth and promising guidance for 2026, are now drawing investors’ attention back to the domestic market. Many institutional players are reallocating their portfolios, taking profits on prior international investments in favor of US stocks.
Despite the short-term resilience of the US market, experts warn of greater economic risks ahead. A prolonged conflict in the Middle East could exacerbate existing economic weaknesses within the United States. Labor market data suggest trends of weakening job growth and rising unemployment rates, which could further impact equity performance and fuel recession fears. Additionally, persistent elevated energy prices are poised to burden consumers, leading to increased input costs across various goods and services. Recent Consumer Price Index reports reflect moderate inflation, but economists predict a potential uptick due to the recent surge in oil prices.
As the situation unfolds, investors remain on high alert, closely monitoring global economic indicators and market conditions, aware that the ramifications of the Iran war could echo far beyond the immediate conflict zone, altering investment landscapes worldwide.
