A ramp-up in fighting between the U.S. and Iran over the weekend has left Wall Street reconsidering its expectations for the war’s economic impact.

The U.S. completed its 10th straight night of strikes against Iran on Monday, after the Houthis in Yemen declared a maritime embargo against Saudi Arabia. This comes after a third service member died amid recent fighting that could mean the war is entering a longer-term and deadlier era. President Donald Trump vowed the U.S. would retaliate, saying in a Truth Social post “they will pay.”

Investors appear to keep brushing off the latest flareup in tensions, with the S&P 500 only falling marginally in Monday’s session after a losing week. It also remains just 2% below its all-time high set in June. Still, economists are worried that energy prices once again ascending could weigh on consumers and the broader economy.

‘It’s about duration’

As far as the stock market goes, the war in the Middle East has had little impact. Since sagging to a closing low of 6,343.72 in late March, the S&P 500 has bounced to all-time highs. That’s in large part due to the assumption that neither the U.S. nor Iran will want a return to outright war — an undesirable outcome, as both stand to lose if the global economy tips into a recession. 

Investors have instead shifted their focus to fundamentals, given that the strength of corporate earnings has picked up speed since the start of the second-quarter reporting season. Last week’s softer-than-expected inflation data also added to investor optimism.

But investors can’t ignore the recent spike in oil prices, nor the rise in bond yields, for long. Brent crude briefly topped $90 a barrel on Monday and hovered just below that level on Tuesday. The U.S. 10-year Treasury yield traded above 4.6% on Monday— a key level watched by traders. It remained near that mark on Tuesday.

If crude and the 10-year Treasury yield continue to rise — or stay elevated for longer than investors were hoping for — Wall Street might have to start pricing in changes to inflation expectations and monetary policy that will eventually hit a company’s bottom line. 

“It’s about duration,” said Art Hogan, chief market strategist at B. Riley Wealth. “If we’re above $85 or $90 into the end of the year, I suspect that the earnings estimates for this year would have to be trimmed.” 

Hogan said the S&P 500 could fall into a correction in a worst-case scenario. But he also specified that the broader index will be helped in part by tech — its largest sector which is also relatively insulated from higher energy prices. Tech has a 38% weighting in the S&P 500, while energy accounts for just 3%, according to S&P Global.

Financials and healthcare are other two sectors that could continue to benefit from secular tailwinds, regardless of higher oil prices. The energy sector and logistics companies that rely on fuel are likely to be the biggest laggards. Ryanair, for example, said on Monday that its weak first-quarter profits reflected delayed bookings because of the Middle East crisis.

The region will be carefully watched for any escalation that deters passage through the Strait of Hormuz.

Marko Papic, macro and geopolitical strategist at BCA Research, said he’s keeping an eye on whether Iran’s hardliners gain more power, or if the U.S. increases the number of troops sent to the Middle East.

Others, however, remain confident in the market, expecting the geopolitical outlook will only improve in the second half of the year. JPMorgan’s Mislav Matejka said he’s sticking to the playbook he’s had since the latter half of March — one in which he uses the rising conflict to continue adding to the dips. 

“We continue to believe that investors should use the dips driven by geopolitical head-lines to add exposure,” Matejka wrote earlier this month. “We believe the market has become increasingly adept at pricing geopolitical risk as transitory.” 

‘All downside’

Economists are concerned about what a potential rebound in fuel prices as a result of the ramp-up in fighting will mean for U.S. consumers and the businesses that serve them.

“There’s nothing but downside here for the U.S. and global economies,” said Mark Zandi, chief economist at Moody’s Analytics. “Obviously, a lot depends on exactly how this all plays out and what it means for oil and other commodity prices. But it’s all downside.”

The average American household has lost around $1,100 so far from the war, a figure that includes increasing energy costs and higher military expenses, according to Zandi. That’s resulted in real disposable income coming in either negative or near flat on an annual basis over recent months, which Zandi said is typically seen during recessionary periods.

Zandi said consumers have turned to savings to prop up spending as energy prices have risen. But Zandi warned that may not be able to last as rainy-day funds dwindle: The personal saving rate came in at 3% in May, down nearly 2 percentage points from a year prior, according to the Bureau of Economic Analysis.

Gasoline prices rose to $4 per gallon on Monday for the first time in more than a month, according to AAA.

Economists expect a resurgence of oil prices to put upward pressure on the consumer price index. May’s 12-month CPI reading came in at its highest level in three years before pulling back last month as energy costs eased.

However, the “core” CPI reading, which excludes volatile food and energy prices, may not move higher in tandem, which could keep the Federal Reserve from needing to hike interest rates. Fed funds futures are pricing in a more than 83% likelihood that the central bank holds rates steady at its gathering next week, according to CME’s FedWatch tool.

“We will get some higher inflation readings because of gasoline prices,” said Luke Tilley, chief economist at M&T Bank and Wilmington Trust. But, “the key for the Fed, as all of them have said out loud, is: Is it going to bleed through to core inflation?”

Companies with value-focused or driving-dependent consumer bases could see their clientele become more selective if oil prices remain elevated, said Consumer Edge analyst Michael Gunther. That could negatively affect businesses ranging from Dollar General to Tractor Supply to Texas Roadhouse, his firm found.

On the other hand, Gunther said warehouse clubs such as Costco and Sam’s Club could win market share as drivers hunt for value. Costco reported “record-breaking volumes” for gas at the end of its third fiscal quarter as the war sent pump prices higher.

“Consumers are paying attention,” Gunther said. “And they are shifting their habits to manage their wallet.”

Retail sales showed consumers continued spending in the face of war-related cost shocks. But Gunther said there were idiosyncratic boosts, such as for event tickets and gambling with the World Cup.

Consumers also had padding when the war broke out from the larger tax returns under President Donald Trump’s “big, beautiful bill,” according to Heather Long, chief economist at Navy Federal Credit Union. But Long said they likely won’t have similar tailwinds if faced with rising energy prices in the back half of the year.

“The cushion is deflating,” Long said. “There’s no other obvious air pump coming.”