S&P Global says muted market response to Israel–Iran unrest may shift with further escalation

International financial analytics specialist S&P Global says that, while the reaction by commodity and financial markets to the Israel–Iran conflict has so far been muted, further escalation could materially affect the global economic outlook.

S&P said in a new report that the impact on major equity indices and sovereign bond markets had been modest—so too, the boost to safe haven assets like the Swiss franc and gold prices.

“All will be highly sensitive to signs of escalation of the conflict,” S&P Global Market Intelligence’s latest Global Economic Outlook noted.

Strait of Hormuz key

The note pointed out that any closure of the Strait of Hormuz could materially shift the near-term outlook for energy prices, inflation, financial conditions and growth.

“The key takeaway from a severe conflict escalation scenario run through our Global Link Model is large output losses versus baseline in the Middle East, Asia-Pacific and Europe, given the importance of energy supply from Gulf producers,” the report’s author Ken Wattret said.

S&P Global Market Intelligence had raised its real GDP growth forecasts for many economies in 2025–26 and most regions in June, consistent with de-escalating trade tensions and somewhat more favourable financial conditions.

Weakening growth momentum

S&P Global’s Purchasing Managers’ Indexes (PMIs) show a weakening of global growth momentum in the first two months of the second quarter.

While the global composite output index picked up a little in May, along with business expectations for the year ahead, both measures remained rather weak by historical standards.

Given the recent developments in the Middle East, a setback in June’s PMI data appears likely, while the early July deadline for the 90-day pause on US “reciprocal” tariffs is also looming large.

Below-potential outcomes

“Our forecasts for this year and next generally imply below-potential outcomes, with projected growth rates below where they were prior to November 2024’s US elections,” the report noted.

“The front-running of higher tariffs has led to stronger-than-expected first-quarter growth rates in many economies, although this effect is already starting to unwind.”

S&P also suggests the US Federal Reserve’s caution over US inflation prospects is likely to linger, despite recent benign consumer price inflation data.

While May’s US CPI figures again failed to show any tariff-related effects, this is at least in part likely to reflect lags.