Key Takeaways
- As stock markets react to the Iran war, analysts say investors should avoid knee-jerk responses and remain diversified.
- A diversified portfolio with a slight energy or commodities tilt could benefit from elevated oil prices.
- A lengthy war and sustained high oil prices could reignite inflation and prompt the Bank of Canada to raise interest rates.
Canadian stocks stumbled in response to the escalating Iran war, which sparked a widespread selloff and caused a spike in oil prices amid concerns over disruptions to global supply. But analysts say stock markets often anticipate the worst, and they warn investors against overreacting to fast-moving headlines.
The Morningstar Canada Index fell 146 points, or 2.38%, on Tuesday, eroding some of the nearly 10.00% gain it’s made in the year to date. Worries over how long the war could last come as trade uncertainty and a stalled economic recovery are acting as headwinds. Analysts argue that the fallout may prove less damaging than feared, even as the situation remains dynamic.
“Markets often price in worst-case scenarios that don’t materialize,” explains Philip Petursson, chief investment strategist at IG Wealth Management. “We warn against paying too much attention to the shock-and-awe commentary that can dominate the news cycle.” He says the ultimate market impact hinges on the duration of the war and its bearing on actual oil supply dynamics.
The price of Brent crude oil jumped nearly 8% to USD 84 a barrel on Tuesday (the highest it has been since July 2024). “The key variable is whether oil actually stops flowing through [the Strait of] Hormuz, not the daily pressers that follow military operations,” says Petursson. Nearly 20% of the global oil supply passes through the strait, which has been shut down since Tuesday. Acknowledging that a sustained disruption to the oil flow is a real risk, Petursson says that in a kinetic war, “noisy news headline can create widespread panic, [and] investors should remain calm and focused on the fundamentals.”
A Near-Term Tailwind for the Canadian Stock Market
For Canadian investors, higher oil is a mixed blessing, according to Ben Jang, portfolio manager and investment strategist at Nicola Wealth. “It helps Canadian energy producers and can support the TSX, where energy is a large weight,” he says. “But it also raises inflation risk, pressures consumers and fuel-heavy sectors, and can keep interest rates higher for longer.” Energy stocks make up over 16% of the S&P/TSX Composite Index.
If the military action is brief—lasting from days to a couple of weeks, with Hormuz disruption remaining short and traffic normalizing—Jang says the most likely outcome is a temporary oil spike and a narrow TSX tailwind. “Brent [could] move in the USD 80–USD 90 range near term, but back toward USD 70 if the conflict de-escalates. In that case, Canadian energy stocks likely outperform in the short term, gold stays supported, and the inflation effect is mostly a headline CPI bump and not a lasting change.”
In a similar vein, IG Wealth’s Petursson says that “higher oil supports energy profits.” But if prices remain stubbornly high, “that’s when volatility shifts into genuine economic risk.” For now, that is not his base case.
A Protracted War Will Stoke Inflation
If the war drags on and rising oil prices “were to double year over year, [then] oil becomes a tax on consumers and a headwind to global growth,” says Petursson.
In a note to clients, William Jackson, chief emerging markets economist at Capital Economics, writes that as a rule of thumb, a 5% year-over-year rise in oil prices usually adds about 0.1 percentage point to average inflation in major economies. A prolonged disruption in energy transportation “could trigger a stagflationary supply shock.” (Stagflation is an economic condition characterized by simultaneous slowing economic growth, high unemployment, and rising inflation.)
“If the [oil price] shock lasts, freight and input costs can bleed into broader prices,” Nicola Wealth’s Jang says. Canada’s CPI has softened over the past few months, falling to 2.4% in January 2026 from 2.7% in October 2025, but he thinks sustained higher oil prices would reverse that relief.
Bank of Canada Policy Implications
At current levels, oil prices are driven by short-term volatility rather than a structural shift in monetary policy outlook, explains IG Wealth’s Petursson. A temporary rise in oil prices provides an economic boost, “allowing the Bank of Canada to remain on the sidelines,” he says.
When inflation effects are large or persistent, restraint may be needed in monetary policy even if growth is weak, says Nicola Wealth’s Jang. “A brief oil spike likely means a longer pause, [whereas] a prolonged shock raises the risk of higher-for-longer [interest] rates.”
Robert Kavcic, senior economist at BMO Economics, says that “if the Bank of Canada was already leaning to be on hold this year and not ease further despite a soft economy, [a negative supply shock] would reinforce that thinking, leaving them more firmly on hold.”
If the war ends swiftly and oil prices retreat, “the Bank of Canada would likely be happy to look through the jump in headline inflation, since it would be temporary and core inflation has slowed considerably in recent months,” explains Bradley Saunders, North America economist at Capital Economics. But if the war rages for months, then the Bank “would need to more seriously consider hiking interest rates this year.” He notes that the likelihood of monetary tightening looks especially strong in light of how ”higher food prices and potential disruption to Canada-United States-Mexico Agreement negotiations are already creating a risk that household inflation expectations rise from already-elevated levels.”
Investors Mustn’t Mistake Disruption for Damage
IG Wealth’s Petursson recommends that when geopolitical tensions arise, one should focus on fundamentals and not noise. “Investors should stay aware of the difference between volatility and structural damage to the global economy,” he says. “Short-term price swings don’t automatically translate into increased downside risk.”
Petursson’s advice to investors: Stay diversified and disciplined. “Energy exposure can provide ballast during supply shocks, and history shows geopolitical flare-ups often fade faster than expected,” he says. “Reacting to headlines is usually more damaging than the event itself.”
Nicola’s Jang recommends broad equity exposure, with a modest tilt toward energy or commodities. “If oil remains elevated, companies with strong balance sheets, reliable dividends, and consistent cash flow tend to hold up better than more speculative growth stocks,” he says.
Jang also points out that higher oil prices and the resulting inflationary pressures tend to weigh negatively on bonds, especially those with longer maturity. “In an oil shock, long bonds do not always provide the same protection if inflation fears push yields higher.” Bond yields and prices move in opposite directions. This means when yields go up, the value of existing bonds—which are locked into lower rates—drops.
