How Wars And Geopolitical Conflicts Can Affect Stock Market Performance: What History Shows And How Investors Can Prepare For Volatility
Investment strategy Sergei Klebnikov Editorial Staff, J.P. Morgan Wealth Management
* Geopolitical conflicts can drive short-term market volatility, but history shows the initial sell-off is often more about uncertainty than a lasting change in long-term returns.
*The biggest risk to watch is whether the conflict disrupts critical supply chains in ways that spill into inflation, financial conditions, corporate earnings and broader economic growth – energy is one common channel, but not the only one.
* What investors can do: Anchor decisions to your plan (time horizon and cash needs), stay diversified, rebalance with discipline and avoid headline-driven moves like panic selling.
When war dominates the headlines, it’s easy to assume stocks should fall in a straight line. But history suggests the first sell-off is often driven more by uncertainty than by a permanent shift in long-term returns – meaning markets can reprice risk quickly, sometimes before the story is fully clear.
In reality, market declines tied to geopolitics are often driven less by headlines themselves and more by what the event could mean for the economy: whether critical supply chains are disrupted, how that pressure feeds into inflation, and what it implies for interest rates, corporate earnings and overall growth. When supply disruptions raise costs, the impact can show up not only in company margins but also in household purchasing power and consumption, which ultimately matters for earnings.
Every conflict is different, outcomes are uncertain and markets can remain volatile as events unfold. A useful way to frame geopolitical risk is as a set of potential supply and demand shocks – for example, disruptions to energy, shipping lanes, industrial inputs or technology chokepoints – and then to ask how those shocks transmit through inflation, financial conditions, earnings and growth.
History can be a useful anchor for decision-making – not for making predictions – and may help investors distinguish short-term noise from longer-term fundamentals. Below, we’ll cover how markets have tended to react to wars and major geopolitical events; what usually drives sustained moves beyond the initial shock; and practical steps long-term investors can take to prepare for geopolitical risk without overreacting.
How wars can move the stock market (and why reactions may vary)
War and other geopolitical shocks tend to move markets through two forces: a sudden surge in uncertainty and the economic ripple effects that follow. That’s why the initial reaction can be sharp even if the longer-term impact ends up being more muted – or simply different – than the headlines imply.
In the initial shock phase, markets may respond to the unknowns. When outcomes are unclear, investors may quickly reassess the range of possible economic paths and reprice risk. Volatility may jump and equities may sell off. In credit markets, that repricing can show up as investors demanding more compensation to hold riskier or more directly impacted debt. That can push credit spreads wider and effectively tighten financial conditions.
As more information emerges, markets often shift into a second phase: repricing based on what the conflict may mean for the economy and policy.
Reactions can diverge depending on whether the situation threatens critical supply chains (energy is one example), disrupts production inputs, alters trade routes, or meaningfully affects major economies. Policy responses can also be pivotal, from sanctions and export controls to changes in fiscal spending.
Ultimately, sustained market moves are often driven less by the event itself than by whether it changes the macro path via inflation, interest rates, corporate earnings and economic growth. Investors may want to focus on whether geopolitical developments are transmitting through the economy and markets – especially through critical supply chains and production, economic activity and demand, inflation expectations, financial conditions, and corporate profitability.
What history shows: Wars often trigger volatility more than lasting declines
History suggests geopolitical events like wars often cause short-lived volatility, and – barring a major economic disruption – the market impact tends to fade over time. In many cases, that looks like an initial, uncertainty-driven drawdown followed by stabilization or recovery as outcomes narrow and attention returns to fundamentals like earnings, inflation and policy.
Recent episodes suggest markets have been recovering from geopolitical flare-ups more quickly: After a nearly 10% drop in the S&P 500 at the outset of the Iran conflict earlier this year, the benchmark index recovered to pre-conflict levels in just 11 trading sessions.
But the more durable takeaway for portfolios is that because the shock phase is dominated by uncertainty and shifting probabilities, market leadership can rotate as the situation evolves – reinforcing why portfolios are typically better built for a range of outcomes.
One reason geopolitical-related sell-offs may prove so short-lived is that markets are forward-looking. Prices adjust quickly to reflect new probabilities – sometimes within days – so once the “shock” is incorporated, further headlines may have less impact unless they change the economic outlook in a material way.
That pattern shows up in the data. A J.P. Morgan analysis of 36 major geopolitical events and conflicts between 1940 and 2022 found that average U.S. equity returns were broadly weaker in the first few months after an event.
Specifically, the S&P 500 returned an average of 0.3% in the first three months after a geopolitical event, compared to an all-time average return of 1.3% during that same period. By six and 12 months, however, average S&P 500 returns after an event were equal to periods without a major geopolitical shock. Footnote 1 Opens overlay
That said, there are exceptions where geopolitics can sometimes have more lasting impacts on markets, especially when a conflict meaningfully changes the economic outlook. The 1973 Arab oil embargo, for example, caused an oil price shock that led to significantly lower-than-average market returns for the S&P 500 in the six and 12 months after the event. Footnote 2 Opens overlay
Rather than reacting to every headline, investors can focus on whether the shock is staying contained to uncertainty-driven volatility or spilling into fundamentals, using indicators such as:
Critical supply-chain disruption signals (shipping routes, delivery delays, key input shortages, commodity/industrial input “risk premium”)
Energy and broader commodity prices (as one common transmission channel)
Inflation expectations (and realized inflation trends, where relevant)
Central bank messaging and rate expectations
Financial conditions (credit spreads, liquidity, lending conditions, equity volatility)
Corporate guidance, margins, and earnings trends
U.S. dollar strength (and currency pressure in conflict-exposed regions)
While these aren’t day trading signals, they may help investors gauge whether the geopolitical story is limited to uncertainty-driven volatility or spilling into fundamentals that can impact equity returns over time.
What really drives markets during war: Energy, inflation, rates and growth
Wartime headlines may move stocks quickly, but what tends to determine whether volatility fades or becomes something more persistent is how the shock transmits through the economy.
Often that starts with supply chain dynamics: Conflicts can disrupt critical inputs, production capacity, or narrow chokepoints that businesses rely on – pushing prices higher through both real tightness and a built-in risk premium. Footnote 3 Opens overlay
From there, the key question becomes inflation and what it means for interest rates. If higher input costs push inflation higher (or keep it elevated), central banks may be slower to cut or may need to stay restrictive for longer. Higher rates can weigh on stock valuations, often hitting parts of the market where more value is tied to future growth.
Next are growth and earnings: uncertainty can delay business investment and hiring, and higher prices can pressure demand by squeezing purchasing power. Some industries may see relative tailwinds while others face pressure, but the pattern can be uneven and hard to time.
Finally, geography and currency also matter. Different regions have different energy dependence and trade exposure, while a stronger U.S. dollar can reshape returns for global investments.
How investors can prepare for geopolitical risk