By Xavier Martinez
This was supposed to be the year for international stocks. Now, the Iran war has U.S. markets on top once again.
Major international benchmarks have tumbled since the start of fighting, while U.S. indexes have suffered milder losses. Since the initial attack on Iran in late February, an MSCI index of global stocks that excludes the U.S. has fallen roughly 10%, while its U.S. index has lost just 5.4%. Germany's Dax is down 11%. Japan's Nikkei Stock Average has slid 9.3%.
The dynamic -- like so many other major market moves in recent weeks -- has been driven by the surge in oil prices. U.S. energy production has helped keep its markets relatively insulated from the shock. Corporate earnings have been strong, and U.S. investments remain a haven in troubled times.
The question now is how long that can hold up. The climb in energy prices is eroding a key pillar of support for U.S. shares -- bets that the Federal Reserve would cut interest rates more this year, lowering corporate borrowing costs and stimulating the economy. Some now think the central bank could even lift rates later in 2026. And the U.S. isn't an island -- if growth slows around the world, American firms are likely to feel the effects.
"Markets are suddenly trying to recalibrate and figure out how long is this going to last," said Donald Calcagni, chief investment officer at Mercer Advisors. "How much damage is going to be done to those economies?"
The swings have upended bets that increased fiscal spending was poised to lift growth and corporate profits in Europe and Asia, at a time when international stocks' relatively low valuations made them attractive to investors worried about richly priced U.S. shares.
Overseas also seemed like a good place to hide out from worries about a bubble in artificial-intelligence stocks. Last year, the global MSCI index surged 29%, beating the U.S. index's 16% gain -- its largest yearly outperformance since 2009.
Now, American energy stocks like APA Corp and Valero Energy are among the few winners in markets this month. They are joined by domestic chemical companies like LyondellBasell and Dow Inc., which are set to pull ahead of international competitors thanks to cheaper natural gas at home.
Michael Rosen, chief investment officer at Angeles Investments, said he added more exposure to European and emerging markets earlier this year, only to reverse course less than two months later. He said Angeles will likely still maintain some exposure to international markets once the conflict subsides, but for now the war has made it nearly impossible to make a confident call.
"We're really very neutral here, waiting to see what path this excursion takes," he said.
There are still plenty of risks to domestic markets. Those include AI jitters, struggles in private-credit markets and a sharp decline in investors' expectations for interest-rate cuts that has sent bond yields soaring, lifting borrowing costs across the economy.
Key central banks around the world kept rates steady this past week, while signaling they were grappling with the prospect that rising energy prices will lift inflation. Futures markets on Friday showed a nearly 30% chance of at least one rate increase by October, up from just 6% a day earlier, according to CME Group data.
David Kelly, chief global strategist at J.P. Morgan Asset Management, said he expects rising fuel prices to eventually force a resolution to the Middle East conflict and restore the dynamics that had boosted the outlook for international companies.
"When we do find that off ramp, we're going to revert to the themes that were driving markets over the past year, and the international theme will reassert itself," he said.
Michael Green, chief market strategist at Simplify Asset Management, said fundamentals never justified some of the enthusiasm for overseas shares in the first place. South Korea, for instance, is heavily dependent on natural-gas imports and sits on the border with an emboldened North Korea, he said.
"I just don't think these are sustainable moves," he said.
Still, many analysts said that the long-term case for international diversification hasn't changed. The valuation gap between U.S. and foreign stocks remains wide. The dollar, despite its recent surge, is still down roughly 10% from its 2025 highs.
Bill Fitzpatrick, portfolio manager at Logan Capital Management, said the selloff has been indiscriminate, creating opportunity for active stock pickers. His international strategy was up more than 10% in the first two months of the year before the conflict broke out. Even after the pullback, companies in his portfolio trade at just 13 times their next 12 months of earnings -- roughly half the S&P 500's price-to-earnings ratio -- with a dividend yield of nearly 4%.
To actually unwind the trade, he said, would take something more severe: an extended period where oil is over $100.
"The core tenets of the thesis are still very much in place," Fitzpatrick said.
Write to Xavier Martinez at xavier.martinez@wsj.com
(END) Dow Jones Newswires
March 21, 2026 21:00 ET (01:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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