By Phil Mackintosh, Senior Vice President, Chief Economist at Nasdaq, and Michael Normyle, Senior Director, Nasdaq Economic Research
Data as of April 23, 2026. The information reflected in this report is based on data available at the time of analysis and may be subject to change.
Economy at a Glance
Figure 1: Key Indicators and Trends
Source: Nasdaq Economic Research
Geopolitics Causing Economic Headwinds
The Iran conflict has been a shock to the economy and markets, mainly transmitted through higher energy prices. Since the start of the conflict—and even after the ceasefire—U.S. oil prices are up about 45%, international oil prices are up about 30% (Figure 2, black line), and European natural gas prices are up 35%. In contrast, according to FactSet , U.S. natural gas prices are down nearly 10%.
Figure 2: Oil Prices Surge Following the Outbreak of the Iran Conflict
Sources: Nasdaq Economic Institute, FactSet, TradingView.com
The significant impact of the conflict on energy prices largely stems from the Strait of Hormuz. According to the U.S. Energy Information Administration (EIA), the strait serves as the transport route for approximately 20% of global oil (Figure 3). Forbes estimates that roughly 20% of global natural gas also transits the strait. It is a critical chokepoint off the coast of Iran, which Iran has effectively closed (Sherwood).
While nearby pipelines offset some of this loss, global oil supply is still down an estimated 15% (Sahm Capital). Since this region is also a major exporter of urea (a fertilizer produced using natural gas), aluminum, and helium (an input in chips production), prices for those commodities have also increased (Wall Street Journal).
So far, markets appear to be pricing a relatively short-lived conflict, with Brent oil prices predicted to fall over the course of the year to roughly $80 per barrel by year-end (Figure 2, grey line), down from around $100 currently.
As uncertainty remains over whether it will remain open or closed, executives should be prepared for both scenarios. Still, it’s important to note that, even once the strait reopens on a permanent basis, it will likely take time for energy supply to normalize, between removing mines from the strait, transit times for shipping, and repairs to damaged energy infrastructure.
Figure 3: The Strait of Hormuz, A Chokepoint for Global Energy Supply
Sources: Nasdaq Economic Research, U.S. Energy Information Administration (EIA)
The Fed: Inflation, Employment, and Rates
The Iran conflict puts the U.S. Federal Reserve (“the Fed”) in a difficult position. Higher energy prices have already increased headline inflation (New York Times), while simultaneously slowing GDP growth.
If the conflict ends soon and oil prices normalize quickly, inflation’s recent rise above 3% is likely to prove short-lived (Figure 4, green line). However, if the conflict extends for several months, some experts predict oil prices could rise to $150 per barrel, pushing inflation as high as 6% (Figure 4, red line).
Figure 4: Inflation Could Re-Accelerate If the Conflict Persists
Source: Pantheon Macroeconomics
Higher energy prices also act like a tax on consumers, who will likely pay more for gas and travel. That could put at risk the early signs of stabilization in the labor market, with monthly private sector job gains holding in barely positive territory (Figure 5).
Figure 5: Private-Sector Hiring Is Stabilizing at Low Levels
Sources: Nasdaq Economic Research, FactSet
Given this uncertainty, markets are essentially pricing two potential paths for the Fed over the next year:
- 43% chance the conflict ends soon, allowing the Fed to resume rate cuts to support the labor market (Figure 6, green line).
- 37% chance that oil prices remain elevated, requiring the Fed to combat inflation with rate hikes (Figure 6, red line).
Figure 6: Markets Are Pricing Two Paths for the Fed: Cuts or Hikes
Sources: Nasdaq Economic Research, FactSet, Federal Reserve, Federal Reserve Bank of Atlanta
What’s Driving the Economy?
Even without the added effects of the Iran conflict, markets are pricing only relatively shallow rate cuts. This suggests recession odds are low and that rates are close to “neutral” levels.
In fact, some economists believe growth could accelerate toward the end of 2026, due to two key tailwinds: 1) tax cuts from the One Big Beautiful Bill Act (OBBBA), and 2) continued investment in artificial intelligence (AI). Together, these forces could help the economy absorb the current shock.
Research from Pantheon Macroeconomics suggests the OBBBA tax cuts could add roughly 1% to household incomes (Figure 7, black bar). However, if the Iran conflict persists and gas prices rise to $4.20 per gallon, those benefits might be completely offset (Figure 7, blue bar).
Figure 7: OBBBA Tax Cuts Could Be Offset by Higher Energy Prices
Sources: Pantheon Macroeconomics
Importantly, lower-income households face a bigger hit from rising gas prices, as they spend a larger share of income on energy while receiving a smaller tax benefit—harming their ability to increase spending.
AI investment is also expected to support economic growth in 2026. AI hyperscalers are projected to increase capital expenditures by roughly 50% year over year, reaching an estimated $680 billion, according to FactSet. For context, last year AI investment proved insensitive to high interest rates and economic uncertainty, accelerating throughout the year and contributing over 40% to GDP growth (Figure 8, blue line).
Figure 8: AI Investment Accelerated Through Q4 2025 Despite Economic Uncertainty
Sources: Nasdaq Economic Research, Bureau of Economic Analysis (BEA)
With growth remaining positive but weak across many countries, a prolonged geopolitical shock may raise recession risks. Notably, however, oil-producing countries like the U.S. and Canada may actually benefit from supply disruptions and higher commodity prices.
What’s Driving Markets?
Despite the increase in energy prices, equity markets have remained relatively orderly since the Iran conflict began. After falling nearly 10% from the start of the conflict (Figure 9, blue bars), the major U.S. equity indexes are now back around record highs (circles).
Research from Deutsche Bank suggests this pattern is not unusual, with U.S. large-cap entities typically bottoming 15 to 20 days after geopolitical shocks, after which fundamentals—particularly earnings—can reassert themselves.
Figure 9: Max Gain/Loss from Start of Iran Conflict and Returns to Now
Sources: Nasdaq Economic Research, FactSet
Earnings growth has provided critical support for stock prices. Since Q2 2025, both the Nasdaq-100® large caps and S&P 600 small caps have posted strong earnings, which analysts expect to continue through at least to Q1 2027. However, the drivers of that growth couldn’t be more different.
The Nasdaq-100® has delivered 11 consecutive quarters of earnings growth exceeding 15%, driven by robust EBIT growth and powered by AI infrastructure investment, cloud computing demand, and digital advertising strength.
Figure 10: Contributions to Nasdaq‑100® Earnings Growth (LTM)
Sources: Nasdaq Economic Research, FactSet
By contrast, small-cap companies tend to be more labor intensive, operate with relatively lower margins, and carry higher levels of floating rate debt. Slowing inflation and wage growth helped turn EBIT growth positive after 11 consecutive quarters of contraction, while the Fed’s pivot toward rate cuts has stabilized interest costs, which should decline further.
Figure 11: Contributions to S&P‑600 Earnings Growth (LTM)
Sources: Nasdaq Economic Research, FactSet
5 Questions Board Members Should Ask Now
- What is our exposure to oil and other commodities affected by Iran, including fertilizer and chips?
- With the global economy experiencing more frequent shocks, how can we insulate our business as much as possible?
- With Fed rate cuts and hikes nearly equally likely, how do we prepare our business for both monetary policy paths simultaneously?
- As U.S. midterm elections approach, what do we need to prepare for if we see divided government?
- As companies increasingly set targets for the quantity of AI output, how do we measure the quality of AI output at scale?
- With inflation once again driving up input costs and consumer spending constrained by higher energy prices, how can we protect our margins?
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The views and opinions expressed herein are the views and opinions of the authors and do not necessarily reflect those of Nasdaq, Inc.