Ten Thoughts on Iran

#1: Tactical View 

The U.S. and Israel went maximalist with a high‑risk, high‑reward decapitation strike. As a tactical matter, it was highly successful. Nearly 50 members of Iran’s senior leadership—including its Supreme Leader—were reportedly killed or incapacitated in the opening wave. Whatever follows, there should be no doubt about the overwhelming superiority of U.S. and Israeli intelligence, surveillance, and strike capabilities.

#2: Strategic View

As a strategic matter, however, we are in a vacuum. We have heard competing articulations of the desired endgame. Is it regime change? Creating the conditions for regime change? Or further degrading Iran’s nuclear capabilities and supply chain for conventional weapons? These are vastly different goals with vastly different exit strategies and vastly different strategic and financial implications. If the objective sits at the ambitious end of that spectrum, count me among those who are skeptical that regime change can be achieved through an air campaign—however spectacular—of limited duration.

#3: Wider Uncertainty Bands

Against this backdrop, all we can say with confidence is that the uncertainty bands have widened dramatically for both tails of the probability distribution. The range of plausible outcomes has expanded to include both the possibility of an exceptionally constructive resolution and a highly destructive one. Markets are being asked to price a much fatter set of tails with very little reliable information about the likelihood of each, or the path in between.

The critical swing factor is whether Iran succeeds in transforming a localized conflict into a systemic shock—either by disrupting physical energy flows or by expanding the conflict horizontally through proxies, cyber operations, or attacks on regional infrastructure (for additional insights on the war in Iran, watch our recent webinar here).

#4: Upside Scenario

To be clear, the positive tail—a “Persian renaissance”—would be historic. Iran may be on the cusp of displacing a brutally repressive regime that has terrorized its own people and destabilized the region for nearly half a century. The upside would be profound: humanitarian relief for the Iranian people, a meaningful reduction in regional conflict risk, and a material reshaping of the global strategic map. Removing Iran as a destabilizing force would allow the U.S. to refocus resources on Asia—its principal long‑term strategic challenge—while further consolidating control over global energy supply. The U.S., Canada, Venezuela, and Iran together account for roughly one‑third of global oil production (roughly equal to OPEC, ex-Iran) and an even larger share of reserves.

For markets, this outcome was barely contemplated a week ago; if it were to materialize, a sharp relief rally would result.

#5: Upside Scenario Details and Probability

But realizing this tantalizing outcome requires a credible execution plan after the bombs stop dropping. That means a strategy to support a peaceful transition toward a regime capable of unifying and stabilizing the country on a path toward moderation. This is far easier said than done, for several reasons.

First, it is doubtful that the Venezuela playbook is transferable to Iran. Its system of governance is more decentralized, more ideologically entrenched, and explicitly designed to survive decapitation. To that end, the regime has built layers of redundancy across a sprawling military‑industrial complex for precisely this moment.

Second, it’s far from obvious that a Delcy‑like figure will emerge from the rubble to anchor a successor regime. And third, the U.S. track record on nation‑building in the Middle East—or anywhere else—is, at best, mixed. I therefore put the odds of a successful leadership transition at no more than 25%.

#6: Base Case Scenario

That leaves two other scenarios. The first is my base case: “We broke it, you fix it.” In this outcome, the U.S. and Israel succeed in toppling the current regime—there is little doubt they possess the military superiority to do so—but are politically unwilling or unable to commit the resources and absorb the risks required to shepherd a durable transition. The result is a prolonged, factional quagmire involving remnants of the IRGC, elements of the regular military, and competing ethnic and regional groups.

In this scenario, the market impact we’ve seen thus far would likely fade as the conflict is increasingly viewed as localized. That would be especially true if the U.S. and the International Energy Agency are willing to release oil from strategic reserves and OPEC continues to add supply as needed to prevent a sustained spike in Brent. Even so, this outcome would likely exert a modest, but persistent, negative impulse for risk assets, as markets would still need to price the dangers of a destabilized Iran on the doorstep of the world’s most sensitive energy chokepoint. I assign this scenario a 50% probability.

#7: Downside Scenario

The worst outcome for financial markets is a battle of attrition in which the existing regime, though decapitated, ultimately prevails—a hydra‑style holdout. In this scenario, Iran hunkers down, prolongs the conflict, and expands its surface area. It escalates attacks on regional neighbors, targets soft civilian infrastructure, sabotages—or credibly threatens—energy assets, activates terror networks abroad, and deploys cyber operations to inflict asymmetric damage. All of this would be aimed at exhausting political will in Washington and provoking a premature declaration of victory.

In such an environment, transit through regional energy chokepoints—most notably the Strait of Hormuz—could be disrupted for a prolonged period. Even absent physical closure, sharply higher insurance premia or the withdrawal of coverage could be enough to reroute shipping and tighten effective supply. Brent could conceivably spike to or above $100 per barrel. The market consequences would be familiar: risk‑off behavior, bear steepening in interest rate yield curves, and a flight to quality—modulated, as always, by the sensitivity of individual economies to higher oil prices. I assign this scenario a 25% probability.

#8: Estimated Inflationary Effects

It is worth recalling that the global economy’s sensitivity to oil shocks has changed materially in recent decades. The U.S. is now the world’s largest energy producer and a net exporter. As a result, the economic effects of higher oil prices—which flow primarily through energy capex and consumption—are largely offsetting, netting out to 10 basis points, plus or minus, of GDP growth. On inflation, a sustained $10 per barrel increase in Brent typically adds roughly 20–30 basis points to headline personal consumption expenditures (PCE), but only about 5–10 basis points are likely to pass through to core inflation, primarily via energy‑adjacent services.

For oil‑importing economies in Europe and Asia, the risks look more like a textbook supply‑side shock: higher inflation, tighter financial conditions, weaker real incomes, and lower growth—with non‑linear effects as prices rise (see Exhibit 1 for estimated effects on European inflation). By contrast, oil‑exporting economies—including Russia, many of the countries in the Gulf Cooperation Council (GCC), and parts of Latin America—benefit mechanically from higher prices through improved terms of trade, stronger fiscal balances, and rising external surpluses. That tailwind persists until and unless energy prices rise far enough, and for long enough, to trigger demand destruction—at which point the feedback loop turns negative for everyone.

Exhibit 1

The potential effects that rising crude oil and natural gas prices may have on European inflation

#9: Monetary Policy Expectations

What does this imply for central banks? The standard playbook is to look through supply side shocks unless inflation expectations become unanchored or second‑round effects (e.g., financial conditions, sentiment) materially weaken the growth outlook. In the U.S., the most likely instinct from the Fed would be to validate its extended pause, while other major central banks will also attempt to buy time—waiting to assess the duration and severity of the shock before adjusting course.

If the conflict persists and intensifies, the uneven exposure to energy prices across economies would trigger growing divergence in monetary policy paths, with material FX consequences. If the Fed looks through the shock while energy‑importing regions cannot, the policy divergence would imply an acceleration of the weaker dollar trend.

#10: The Macro Question of Our Time 

In terms of longer‑run impact, it bears emphasizing that war is among the bluntest instruments available to policymakers—economic or military. It unleashes second‑order effects that are impossible to anticipate or forecast in advance, and this episode will be no exception.

It also underscores that the global economy is now caught in a tug‑of‑war between two powerful and opposing forces: on one side, the promise of a once‑in‑a‑generation (or century) tech‑driven productivity boom that could lift trend growth, suppress inflation, and underpin a version of financial market nirvana; on the other, a fractured geopolitical landscape defined by more frequent conflict, economic warfare, energy insecurity, rising military spending and fiscal dominance, growing risk of nuclear proliferation (to avoid Iran’s fate), and the example that might makes right in a results-based—not rules-based—order.

Which of these forces ultimately prevails is the defining macro question of our time.