From being just a fringe risk, conflict in the Middle East has become a top worry for investors unsettled by the prospect of a power struggle in Iran and a protracted regional war, with ramifications for everything from global trade to inflation.

U.S.-Israel strikes killed Iranian Supreme Leader Ayatollah Ali Khamenei on Saturday, sowing chaos as Iran struck back at Gulf cities, airlines halted flights and tankers carrying oil and other products suspended transit through the key Strait of Hormuz.

The first risk for markets is the uncertainty over what happens next in Iran, given the complexities of the Islamic Republic's ruling system, the ideological nature of its support base, and the power of its Revolutionary Guards.

MIDEAST 'TAIL RISKS'

That then complicates the outlook for oil prices which have been rising for weeks, but are now hostage to what oil-producing countries do and how passage of tankers through the Middle East is affected, with big implications for inflation worldwide and even the safety of bonds hitherto deemed havens.

"Middle East tail risks have increased. Markets will reprice from geopolitical shock to regime risk shock, prolonged conflict, not just retaliation, unless Iran says it wants to negotiate," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.

A bigger risk, analysts said, is complacency in markets that have assumed the fallout would be limited, like it was during last June's "12-Day War" in Iran or during Russia's numerous attacks on Ukraine, and dismissive of any comparisons to Iran's 1979 regime change.

So far, Brent crude is up by a fifth this year at around $73 a barrel, and investors have purchased U.S. Treasuries and gold as hedges for a variety of risks, including Middle East tensions and President Donald Trump's erratic policies.

Gold had a record run last year and is up 22% so far in 2026. The main U.S. stock index is up just 0.5%.

"History argues strongly in favor of selling geopolitical risk premium when hostilities start," Barclays analysts said in a note on Saturday. "What worries us is that investors have now learned this pattern and might be underpricing a scenario where containment fails."

Barclays analysts point to other factors that could exacerbate a selloff should the conflict escalate, such as existing concerns around the artificial intelligence boom and private credit markets.

"We would recommend not buying any immediate dip – risk-reward doesn’t seem compelling. If equities pull back enough, say over 10% in the S&P 500, there is likely to come a time to buy. But not yet," they wrote.

WHAT'S SAFE?

Markets are set to be volatile in the coming week.

"The markets are prepared for a limited surgical strike. What is not priced in is a major strike to decapitate the regime," said Charles Myers, chairman and founder of Signum Global Advisors, a geopolitical investment consulting firm. He was speaking before the weekend U.S.-Israel strikes.

William Jackson, chief emerging markets economist at Capital Economics, expects a prolonged conflict affecting supply could cause oil prices to jump to around $100, potentially adding 0.6-0.7 percentage points to global inflation.

"In my view, the market has already been overestimating inflationary forces, so I don’t think this will change much. There will be more impact on Europe than U.S. given the closer proximity of Hormuz oil and gas post-Russia," said Tariq Dennison, a wealth adviser at Zurich-based GFM Asset Management.

"Maybe a slight short term uptick on gold, but gold has already priced in maximum geopolitical uncertainty."

Eastspring's Goh pointed to the steady drop in U.S. yields, which has brought 10-year yields to below 4%.

"I’m not sure if buying US Treasuries here is a good trade, especially if oil prices spike and induce inflation, if this thing drags," he said.

On the other hand, some analysts expect Iran will not be able to disrupt trade in the Gulf region and the impact on oil prices will be contained.

"We wouldn’t be surprised if any selloff in the S&P 500 on Monday morning turns into a rally, driven by expectations of lower oil prices once the latest Middle East war ends," said Ed Yardeni, president of New York-based Yardeni Research.

"The price of gold might also round-trip on Monday. Bond yields might fall due to both safe-haven demand and post-war prospects for lower oil prices," he said.