Conflict in the Middle East: Navigating headlines and portfolio positioning

Amy: On Monday, March 9, 2026, Phillip Neuhart, Head of Market and Economic Research, and Thomas O'Keefe, Managing Director of Portfolio Strategy, talked about how we're thinking about portfolio positioning in light of recent geopolitical headlines and market events.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice.

Thomas: I'm Thomas O'Keefe.

Phil: I'm Phil Neuhart.

Thomas: And today, we're going to be walking through some of the headlines that we've been seeing in the news lately—specifically, how they're impacting our thinking on the market and the economy. We've seen an attack by the US on Iran in February. We've seen a lot of up-and-down news in terms of AI and its impact on the markets and the economy.

But most recently we saw a labor report come out last week. So, Phil, how about you start there and tell us what you saw, what you read and how you're thinking about it?

Phil: Yeah. So we had a fresh jobs report Friday morning. In weeks like last week in which there's a conflict in the Middle East, it is easy to forget the fundamental data continues to flow. What we saw in that report from the Bureau of Labor Statistics was a job loss.

Expectations were for a modest gain, and we saw a job loss—not to mention a revision downwards the prior 2 months. And the unemployment rate ticked up as well. So certainly not a rosy jobs number. I think it's a reminder that the labor market is somewhat fragile. We're kind of in a slow-hire, slow-fire environment. Hopefully, it remains a slow-fire environment, but this has implications not just for investors but for the Federal Reserve.

We'll be talking about the price of crude here in a moment, but you do see inflationary pressures from that. At the same time, we are not coming into this period with an extremely strong labor market. It's okay but not great, to say the least.

Thomas: Yeah, labor market certainly is the foundation of the US economy here. So really important to continue to track that. But let's shift quickly to the Middle East.

I want to start by just saying we understand the humanitarian crisis that's going on over there. Wars are not easy. We want to be sensitive to anybody who's directly impacted by this. Today, we're just going to quickly talk about how it potentially impacts the markets.

So the war was launched on February 28th. We're recording this on March 9th. And so as of Friday, equity markets are all down—S&P 500 down 2%, emerging markets and international developed down almost 7% each. Oil prices have shot up as of this morning to over $100 a barrel. We've seen a lot of volatility. The VIX has shot up over 20%.

And we've seen yields increase, which might be a little counterintuitive. So Phil, maybe talk a little bit about how we see that yield increase and why we think that is and other impacts on the market from this war so far.

Phil: Yeah, just to add to your comment on stocks, the S&P futures, as of this recording were down about 1% this morning on Monday the 9th. So certainly continued volatility expected. I think it's all about—when you think about rates and really this entire picture—it's about the price of crude oil and natural gas, right?

Crude WTI, or West Texas Intermediate, is up over 50% from where it was the Friday before the conflict broke out. And we, as you mentioned, we see Treasury yields, the 10-year up over 23 basis points since that Friday as well. That's over 0.2% up.

Why are rates up instead of down? Often when you see conflict breaks out, people flee to safety, so they buy things like Treasuries. Well, when prices go up, yields go down. So normally, you'd expect yields to go down, but this time it's all about the price of energy.

And if that's inflationary, that puts upward pressure on yields because there's implications for the Fed, right? So if you look at the Friday before the war broke out—Friday, February 27th—futures were pricing that the Fed would cut this year 2.4 more times—2.4 cuts this year.

Today, that pricing is only 1.5 cuts. So you have seen the idea of rates falling at least at the front end of the curve, short-term rates from the Fed, that has dissipated because you're seeing this inflationary pressure. So that's why I think rates are higher. It's also why we are seeing pressure on stocks is the transmission mechanism here is the price of energy.

Thomas: Yeah, so let's go a little deeper into oil real quick. Obviously, higher oil prices have a huge impact across the entire economy. We could see corporate profits go down. This could stunt growth, like you said, increase inflation. Do you see this being a major problem in sustaining growth not just in the US but across the globe?

Phil: Well, it's certainly a challenge, right? You could argue our economy is not quite as levered to the price of crude oil as it once was, but it has an impact. It's going to have an impact at the pump, right, so gas prices. That impact, of course, finds its way into consumer spending.

So seeing that the stock market is down—not too dramatically, but down at least modestly—does make some sense to us. When you think about direct impacts with the Strait of Hormuz being closed, that's about 20% of oil supply goes through that strait, which is really incredible to think about.

There are parts of the globe that are a little bit more exposed. So think Asia, for example. Much more of their oil flows through the Strait of Hormuz than, say, in the US, but oil is a global market. So the price does impact all of us—for example, gasoline prices.

Another thing I should point out is Europe has real exposure here, and a lot of that's actually through natural gas prices, liquefied natural gas, which in Europe as of this morning is up, let's see here, up 91%—91% from the Friday before the conflict broke out. So there are certain regions that are certainly more exposed, mentioned Asia, Europe, but I don't want to discount the exposure that US consumers are going to feel just because when oil goes up, you do feel that at the pump.

Thomas: Yeah, so what I'm hearing from you is consumers are going to be paying more, so their costs are getting higher. And with the labor report, we're not seeing as much employment. So really we're hoping for a resilient consumer through all of this.

Phil: Yeah, and look, when you think about our positioning coming to this year, our outlook was literally titled cautiously constructive, right? We did not think that this year was going to be perfect. We do think we were coming in with some softness in terms of the fundamentals for the market.

Our price charter for the S&P 7,300—that's modest compared to many forecasters. But if things were to worsen, which is not where we are right now, but if this were to persist for an extended period of time, of course, there's risk to our bear case, which is down at 5,300 on the S&P 500.

Thomas: Yeah, it makes sense. Let's shift quick to artificial intelligence. It's been on everybody's mind for quite some time now. But we've seen so far in 2026, it's had more of a negative impact on the markets than it has a positive impact.

Some of this is through headline news. We've seen what's going on with the Department of War. Some of it is just concerns about the spending that's going on and the overall impact. So give us a few of your thoughts on what you're seeing out there and what you're hearing in terms of AI's overall impact.

Phil: Yeah, this story is not going anywhere. I've been on the road a lot lately, and of course the war is on our clients' and prospects' minds, but AI is as well. This is a story that's going to persist. As we mentioned in our most recent monthly video released in late February, the current estimate for capital spending on generative AI this year is $650 billion, which is just an incredible number. Just rewinding back to 2020, for example, that was under $100 billion.

So this is not a story that's going anywhere, but we are watching capacity utilization. And we even highlighted in that presentation that primary occupancy rates in data centers is still very high. As long as there is demand for these data centers, we're okay.

But something we're seeing in the marketplace I think may be hopeful, which is the Magnificent Seven, these big stocks have pulled us higher for years, right? Hyperscalers, the hope of AI. What we've seen so far year to date, and this is true before the war and is still true today, small cap in the US are outperforming Magnificent Seven, which are actually down year to date.

If you look at the equal-weighted S&P 500 where all companies are worth the same amount versus, say, one large company having an oversized weight, it's outperforming the S&P 500 and the Magnificent Seven. International outperforming as well. So we have seen this broadening. And the idea there, I think at least part of the idea is—one, these companies have lagged. There's a valuation story.

But also, if AI is going to benefit and drive efficiencies and help margins, well, it cannot just be the biggest companies. Smaller companies have to benefit as well. So I don't think this theme is going anywhere. I think we're still in the fairly early innings of this story. But seeing some broadening outside those biggest names actually makes me feel better about the market and where we stand today.

Thomas: Yeah, and this is exactly, if I can pivot a little bit to how we think about allocating to this particular sector theme as well. We take a very risk-managed approach, where we're not going to put all of our eggs in one basket, we're not going to try to pick winners and losers. We understand that the impact of AI is not just a lot of massive CapEx from a few concentrated companies in the tech sector.

Although that certainly exists—and we certainly have some exposure to that through our overweight and US large-cap growth—we tend to believe that there will be impact across all sectors. And over time, we do believe that the inefficient sectors, sectors that adopt technology slowly or have a lot of potential disruption within them, AI will be a big part of that.

So think healthcare sector, think the education sector. These are places where we think AI actually will have an outsized impact. So it's not just going to be, you know, five or six really large tech companies that we need to be exposed to in order to actually participate in the AI boom.

Phil: Yeah, if this theme is going to last, other companies have to benefit. And so, it's great to see us positioned that way.

Going back to the Middle East, what exposure do we have from a portfolio's perspective to that conflict?

Thomas: Yeah, so we have no direct exposure to Iran, meaning we actually have no dollars invested in any companies domiciled in that country. And for that matter, nothing broadly in the Middle East either.

So we have no direct exposure to that. Now there can be some indirect exposure, meaning a company domiciled in the US, a multinational or in Europe, can do business potentially with some Middle Eastern countries.

It wouldn't be a lot, but they can. So there could be some maybe revenue generated from there. So there is some indirect exposure potentially, but no direct exposure at all in terms of our actual dollars invested.

What we do see, though, is we see the inherent impact of conflicts of this to different sectors and asset classes. So emerging markets is certainly more impacted, and we've seen that in the numbers, more impacted by these conflicts obviously than Europe, Japan, US, other developed nations, other regions.

And this is for a few reasons. Obviously, there is a higher sensitivity to geopolitical conflicts within the emerging-market sector. This should make general sense. We see more instability within its market. We see more instability within the governments and the regimes. That's inherently why they're called emerging markets. And so those are usually trading at a discount, those countries, because of that risk. There's other risks, but one of the risk is because of this geopolitical sensitivity.

We also see a stronger dollar, which we have seen in this particular conflict, but a stronger dollar will make our investments as US investors, our investments in internationally domiciled countries and companies, it will make it worse right off the bat, right? And so we're going to see part of the attribution of, I think I mentioned earlier, about 7% down in both emerging markets and international develop.

Some of that is coming from currency, right? A stronger dollar makes those investments worth less to US investors. Now over alonger period of time, a stronger dollar could actually improve our model, could improve, you know, the exports of these countries. But for now that's actually not a good thing for them. So we should see downward pressure in emerging markets.

Phil: Yeah, and oil, of course, that exposure we mentioned in Asia remains a major story. So we're constantly reminding clients—and something we do regularly when we see geopolitical events, war, conflicts—is that often, these events have major impact on markets in the near term but are not lasting in the long term, right?

And for our long-term investors, often the best thing—and we saw this with tariff announcements last spring—that the best thing is to try to look through this volatility. What are you seeing and what are we saying from that perspective for long-term investors?

Thomas: Yeah, every conflict is different. Every event is different. And to your point, tariffs are going to have a different impact on the market than the Russia-Ukraine war, different impact than what we're seeing right now with the US attacking Iran.

But what is typically consistent over time is that the impact of these events is really accentuated within the first weeks, months, depending on what the particular vendor conflict is. And then the fundamentals of the market actually take over.

So the markets will start to trade more on the fundamentals, on labor reports, you know, on how strong the consumer is, on what we see with growth. And so this just goes back to our principles of how we build portfolios and wanting to stay long term, wanting to stay diversified, wanting to understand the risks, wanting to understand if we're going to shift allocations away from where we currently are, we need to be seeing a meaningful benefit from that on a risk-adjusted basis.

And so we don't want to be overly reactionary, and we want to stress to our clients, trust the process and make sure that we are looking at our long-term goals and our long-term risk-adjusted, sort of, return outputs and outcomes that we're looking for.

Phil: Yeah, whether we're talking about an institution or individuals, this is why you have a plan. And it's times like this are the most important times to stick to that plan.

Thomas: Yeah, that's absolutely right. I couldn't stress that enough, even though I think I sound like a broken record. Thank you for listening, and we hope to talk again soon.

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