Despite the tragedy unfolding between Israel and Iran, U.S. markets have remained surprisingly resilient. S&P 500 futures reclaimed the 6,000 mark early Monday—just 2% shy of record highs. But RBC Capital Markets’ Lori Calvasina warns that this calm may not last.

Oil Spike Threatens Fed’s Inflation Outlook as Middle East Tensions Rise

She outlines three ways the conflict could hit stocks:

1. Valuation Pressures

Geopolitical uncertainty tends to compress price-to-earnings (P/E) ratios. Calvasina notes that national security threats, much like economic policy fears, usually lead investors to assign lower valuations. With P/E multiples already elevated, stocks are particularly vulnerable now.

2. Investor Sentiment at Risk

Recent gains in market confidence—especially among investors—have helped fuel the rally. But if the conflict rattles sentiment, optimism around IPOs and dealmaking could evaporate. Corporate earnings calls have shown that even events like wildfires or flu outbreaks affect behavior. Middle East tension will likely do the same.

3. Oil Prices and Fed Policy

RBC sees room for Brent crude to surge if supply is disrupted. That could reignite inflation, muddy the Fed’s rate-cut path, and pressure equities. In a stress test, RBC assumes higher PCE inflation, limited rate cuts, and steady Treasury yields. The result: S&P 500 fair value could fall to 4,800–5,200 by year-end—well below Friday’s close at 5,977.

In short, while the market appears stoic now, surging oil and rising uncertainty could throw the Fed—and investors—off balance.