“Simply Put”, the weekly column from the Multi Asset Group team at Lombard Odier Investment Managers
By Florian Ielpo, Head of Macro
Summary: – The war between Iran and the United States triggered in late February 2026 acts as a global supply shock and a test for U.S. fiscal sustainability. – Academic research confirms that wars temporarily stimulate GDP and public demand but generate inflation and private capital displacement. – The positive effects are generally localized – defense, energy, small caps – but come with the risk of stagflation.
The war initiated by the United States and Israel against Iran on February 28, 2026, plunged the global economy into a new phase of uncertainty, going beyond just energy. The Hormuz Strait, a vital passage for a fifth of the world’s oil, became a major geopolitical flashpoint. The immediate consequences were a 60% spike in oil prices, a 40 basis point rise in U.S. interest rates over a few weeks, and a 5 to 8% correction in stock markets. Despite the U.S. economy not being in a recession or overheating, with expected real GDP growth at 2% and inflation at 2.8%, the consensus surrounding a “Goldilocks economy” seemed to be in question.
A fiscal engine with critical budgetary constraints: – Military expenditures have a minimal impact on GDP due to negative effects on private consumption and investment. – Military spending is usually financed through debt, leading to increased deficits, yield curve steepening, and inflation. – Investment benefits from defense orders but remain limited to specific sectors, primarily technology and cybersecurity.
In financial economists’ terms, wars act as a “reallocation stimulus,” redistributing wealth more than creating a net gain. This reality emphasizes the likelihood of a mild stagflation scenario as a result of the Iranian conflict, characterized by weak growth, rising energy costs, and persistent inflation rather than a clear rebound in stock markets. Let’s examine the visible economic effects of U.S.-led wars on its own economy.
A century of wars and budgetary constraints: – U.S. history reveals distinct macroeconomic impacts from major conflicts, correlated with war duration and intensity. – Costliest wars do not necessarily lead to major market impacts, as seen in the Afghan conflict compared to the Vietnam and Gulf wars. – Post-conflict financial indicators confirm three distinct phases observed in historical data.
In 2026, the U.S. is poised to be more armed than wealthy, more inflationary than prosperous.
Macro/Nowcasting Corner: – Recent developments in global growth, inflation surprises, and monetary policy indicators are analyzed. – Nowcasting indicators show a decline in global growth mainly due to Eurozone deterioration, while inflation indicators surged, surpassing 50%. – Global monetary policy signals remained stable, with differences in the U.S. and Eurozone trends.
Overall, the war with Iran acts as a global energy impetus, supporting sectoral profits but weakening overall growth. In 2026, the U.S. is projected to be more armed than wealthy, more inflationary than prosperous.
