The Iran War is causing market swings. Can it bounce back?

Record stock market highs seen over the first six months of the Trump administration were interspersed with pangs of instability driven largely by tariffs. But now widespread uncertainty has gripped Wall Street as the war in Iran concludes its fifth week.

Following the U.S.-Israeli strikes on Iran, the Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500 slid toward correction territory, where there’s a decline of about 10% or more in a stock index from a recent peak.

In recent days, each index sank to its lowest point in months before snapping back sharply on renewed hopes of a de-escalation of the crisis. That pre-war optimism had been buoyed by a powerful mix of strong corporate profits and investments in next-generation technologies, such as artificial intelligence.

These and other fluctuations — including more jumps in oil prices after President Donald Trump delivered a primetime address on Wednesday where he said the war would continue for at least another two to three weeks — have raised concerns about whether the recent run of market optimism is beginning to crack, or simply entering another familiar cycle of volatility driven by geopolitical shocks.

Markets fall into certain patterns in times of war, said John Bai, a Northeastern University professor of finance. Every headline can jolt the major indices in one direction as investors struggle to parse through the noise and anticipate a return to growth conditions.

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“The market doesn’t fear negative news per se,” Bai said. “What the market really fears the most is what we call a ‘second-moment shock,’ which is a fancy way of saying uncertainty.”

Modern wars tend to have an immediate, sizable impact on markets in the short term, Bai said. That is often a result of those “secondary” shocks, as conflicts ripple through global supply chains, disrupting energy flows and commodities and driving up input costs across industries.

That was the case during Russia’s 2022 invasion of Ukraine, which sent oil and natural gas prices surging, choked off grain exports from one of the world’s breadbaskets and fueled a broader spike in inflation that reverberated through global markets.

But history shows that war-induced volatility tends to be temporary. The stock market fell an average of just 4% across 30 major geopolitical events since 1939, according to data from the Deutsche Bank Research Institute, the bank’s global research division. In the first three weeks of a geopolitical shock, stocks typically fall about 6% before recovering completely in the following three, according to Deutsche Bank.

Once the trajectory of a conflict becomes clearer and risks are priced in, markets stabilize and often rebound, Bai said. The markets ultimately metabolized the supply shocks of the Ukraine conflict: the S&P bottomed out on March 8, 2022, before rebounding about 9% by the end of March, erasing most losses seen in the days following Russia’s invasion.

“Now, looking back on the past four years, the stock market actually rose quite substantially from those dips, because once the uncertainty gets resolved, people start to factor that into prices,” Bai said. That means that it might not yet be time to panic about climbing mortgage rates since the start of the Iran War five weeks ago and the Organization for Economic Cooperation and Development adjusting its outlook on prices because it projects that U.S. inflation will rise to 4.2% this year (up from 2.6%).

In Iran, the situation is slightly different because of the “chokepoint risk” associated with the Strait of Hormuz, which is “one of the single most important chokepoints in the global energy system,” according to Nada Sanders, distinguished professor of supply chain and information management at Northeastern. Roughly a fifth of the world’s oil supply passes the waterway, which divides the Persian Gulf and the Gulf of Oman, each day.

Given our reliance on petroleum, or crude oil, for a wide range of goods and services, the war could influence the Federal Reserve’s next moves, with rising energy prices potentially stoking inflation and even forcing policymakers to reconsider rate cuts, which could further drag the economy, Bai said.

If the administration makes good on the promise of an expeditious end to the conflict, Bai anticipates a return to market optimism, citing the strength of corporate earnings. Despite the ongoing war, analysts expect S&P 500 earnings to grow roughly 13% in the first quarter of 2026, which would mark a sixth straight quarter of double-digit gains, according to data from FactSet, a financial data and analytics firm.

“I think it’s fair to say that during times of uncertainty, investors generally overreact,” Bai said. “But new information is always arriving, and technological advancements continue apace. From that perspective, what we’re seeing is nothing new.”