The Impact of War on Stock Markets and National Economies - Updated March 2026, Part 1

War, while devastating on human, social, and environmental levels, also creates significant ripples across global economies and stock markets. Since this article was first published two years ago, the world has witnessed a dramatic escalation in geopolitical conflict - most recently the joint US-Israeli military strikes on Iran in late February 2026. This updated piece incorporates those developments, alongside ongoing conflicts in Ukraine and the broader Middle East, to provide a more current picture of how war shapes financial markets.

Historical Trends in Stock Markets During War

Historically, stock markets tend to react negatively in the immediate aftermath of war due to uncertainty and risk aversion. However, certain sectors - defense, technology, and commodities like oil - often see an uptick as governments ramp up military spending and resource security becomes a priority. During World War II, for example, American manufacturing companies that pivoted to war production experienced substantial growth, aiding broader market recovery during and after the conflict.

The stock market's response varies depending on the scale and location of the conflict. Regional wars tend to have a more localized impact initially, but can lead to broader economic consequences if they disrupt global supply chains or critical energy infrastructure. The 2026 Iran conflict illustrates this clearly: within hours of the strikes, oil markets, defense stocks, and gold all spiked materially as traders priced in geopolitical risk.

Economic Impacts of War

War can have a dual-edged effect on national economies. On one hand, increased government spending on defense and infrastructure can stimulate growth, particularly for economies emerging from downturns. This was the case during World War II, widely credited with lifting the United States out of the Great Depression through massive public expenditure that slashed unemployment and drove demand across industries.

On the other hand, wars strain financial resources, balloon national debts, fuel inflation, and disrupt trade and investment flows. These risks are compounded when a conflict emerges against an already fragile economic backdrop - as is the case in 2026. The US economy heading into the Iran conflict was already contending with lingering inflationary pressures, weak job growth, and consumer pessimism. Adding an energy-price shock to that mix creates a particularly difficult environment for policymakers.

Sector Performance During Wars

Certain industries tend to perform better during times of conflict. Defense and military industries are the most obvious beneficiaries. Other sectors that typically see growth include:

• Energy and Commodities: Price volatility and supply disruption can drive significant gains, particularly for producers outside the conflict zone.
• Defense and Aerospace: Government contracts surge; stocks in this sector typically spike in the opening days of a major conflict.
• Technology: Military needs often accelerate innovation, particularly in areas like cybersecurity, drones, and surveillance.
• Gold and Safe-Haven Assets: Investors rotate into gold and US Treasuries during periods of uncertainty, driving prices higher.

Conversely, industries like tourism, shipping-dependent retail, and aviation can suffer from rising fuel costs, disrupted supply chains, and dampened consumer confidence.

The Great Depression and World War II: A Case Study

The Great Depression of the 1930s led to unprecedented economic downturns globally, with soaring unemployment and collapsing output. The onset of World War II catalyzed a massive economic mobilization - in the United States, federal spending increased dramatically, military manufacturing created millions of jobs, and household incomes recovered sharply.

By the end of the war, the US economy had dramatically turned around, laying the foundation for decades of post-war prosperity. This case remains the most cited example of war as an economic stimulus, but it is important to note the conditions that made it possible: vast untapped industrial capacity, severe pre-war unemployment, and a government willing and able to run large deficits.

Please come back tomorrow for Part 2 of this topic. This article is for informational purposes only and does not constitute financial or investment advice.