Markets are fickle. Even if we knew exactly what was going to happen in the world before they did, it’s another matter entirely to guess what the reaction would be. Investors in gold, bonds and US equities might currently be experiencing a bit of shock at how markets have performed this year.
This can be unnerving. We expect assets to follow a certain pattern most of the time, but on occasion, they’ll veer off the expected course. It’s important to remember in these times that markets don’t always move in a way that seems immediately logical. Instead, they are shifted by masses of investors moving their money. Often, these moves aren’t caused by the actual event, rather the expectation of the event.
In the case of the US-Iran war, many of the consequences have come from the expected knock-on effects on inflation and interest rates that are yet to really be seen.
Gold is on the outs
Gold was constantly making headlines at the beginning of the year as it hit new highs, with a peak of $5,559.72 on 29 January. Historically, it’s an asset that soars amidst uncertainty. But in one of the most tension-filled market periods as war broke out in the Middle East, it fell.
In March gold was down 21% from its January high, levelling out around $4,800 per ounce (at least for now). So why have markets decided that this time around, gold isn’t the right buy?
A range of factors will be at play, but one of the main issues seems to be how interest rate expectations have changed.
Since oil price increases have caused expectations of rising inflation, experts have predicted that governments will change tack on rates, reverting to rises instead of continuing cuts. If these interest rate increases come into play, cash rates will also rise.
Although gold it is a much more volatile asset class than cash, many people see gold as a safe haven. As interest rates on cash were looking less appealing, investors were more interested in gold leading to peaks in the price. Now, as cash rates look to be on the rise, it could be part of the reason investors are exiting gold, particularly as it is an asset class which doesn’t generate any income.
Another factor could simply be a change in investor sentiment. Gold climbed 65% in 2025, and those who had been invested over this period may have chosen to lock in their gains, rather than risk a drop in the price.
Bond yields spike
Like gold, many people invest in bonds when they are looking for a safe haven. But while gold is constantly volatile, bonds are typically a steadier piece of a portfolio.
In the past two months, this has not been the case, causing an unpleasant surprise for investors that chose this type of investment for a steady ride. Typically, equities are a much more volatile area than bonds, but bonds do tend to be more sensitive to geopolitical conflict, especially when there’s impact on the economy at home.
One of the keys to bond price movement stems from inflation and interest rates. After the US and Iran went to war, markets shifted not just on the increase of energy prices, but on the expectation of interest rate changes. Although the next rate decision doesn’t come until the 30 April, markets were moving early in March on the belief that the Bank of England would increase interest rates to curb inflation that would result from rising energy prices.
The 10-year gilt yield moved from 4.2% at the end of February to 5.1% by the 21 April, the highest level it’s reached in nearly 20 years.
Bond yield explainer
While an increase in bond yield might sound good, for prices, it’s typically not. This means that investors are less attracted to these bonds, so they are having to be offered at a lower price to sell. So, for those that are already holders of bonds, or bond funds, the environment has become more volatile as these new rate expectations come into play.
Gilts are also under pressure thanks to the uncertainty around Keir Starmer’s position as prime minister, gilt buyers feel more uncertain about the UK outlook.
The good news for bond investors is that these shifts are already being priced in. This means that although the event hasn’t yet happened, the markets are already factoring it into their analysis. So, if experts have made accurate predictions for interest rate changes, there’s a good chance there will be modest shifts to bond yields when the changes are announced.
But, since markets are operating on predictions rather than the event itself, it can sometimes mean they overshoot. The current rise in yields is heavily based around the interest rate expectations, not concern about if the UK will repay those loans. Some experts have suggested that the inflationary effects from Iran may not be as extreme as markets are pricing, which could lead to these yields relaxing.
US equities show surprising resilience
Investor interest around the US was starting to cool before the war in Iran began, so it would make sense that the US going to war would deter investors further.
However, at the outset of conflict, US equities did not take as dramatic of a fall as many other asset classes, primarily due to North America’s energy independence (The US is a net exporter of oil and natural gas).
As of 21 April, the S&P 500 has returned 4.1% in USD year to date, reached a record high, and climbed 12 percentage points from its 30 March low.
This dramatic rally was boosted by strong earnings results from US banks, such as Citigroup and Morgan Stanley. For investors, this concrete data may have been a clearer symbol that industries are able to carry on despite the geopolitical conflict, rather than trying to compile it from a macro picture.
The full effect of geopolitical conflict on earnings may still come into play further down the line, but historically, the S&P 500 has not been heavily impacted in the long term. In the first three months following conflicts from 1940-2022, the S&P 500 averaged a return of just 0.3%, compared to a 1.3% all-time average, according to JP Morgan. However, after six months, returns following conflict and the overall average were both 2.6% and 5.5% on a yearly basis, showing that the impact seemed to die down relatively quickly.
Markets will be keeping an eye on earnings forecasts and business reactions as the conflict continues, but if history is a guide, it could end up being a minor impact compared to, for example, the trajectory of corporate earnings.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
