Iran War Weighs on Markets—but a Swift End Could Spark a Recovery Rally

Market downturn erases early 2024 gains as energy stocks surge ahead

The steep losses across nearly all sectors, industries, and markets in March have almost entirely reversed the overwhelmingly positive picture from January—when, for the first time since August 2024, every sector was riding an upward trend.

Now, nearly half of all sectors have slipped back into downtrends—a shift last seen about a year ago, when then-U.S. President Trump dramatically escalated his trade war. Back then, markets rebounded quickly once he began to backtrack.

A rapid resolution to the Iran conflict could trigger a similar bullish reversal. Judging by recent market reactions, investors haven't yet abandoned hope of such an outcome.

Energy and Utilities Lead the Way—Utilities?

For now, the sector rankings reflect the expected rotation: the oil and fuel crisis has propelled the energy sector to the top. More surprising, however, is the strength of utilities. They're benefiting twice over—first, from their reputation as defensive stocks, and second, paradoxically, from rising prices.

While small consumers (households and small businesses) often have fixed-rate contracts, large customers typically operate under flexible tariffs. Depending on the provider, flexible supply volumes can account for up to 70% of all deliveries. This gives utilities significant leverage to pass on higher procurement costs immediately. But that's not all.

The same dynamic applies not just to oil and—above all—gas, but also to electricity. Here, the merit-order principle comes into play: when gas prices rise across the board, electricity prices follow suit. Under this system, the highest marginal cost among power plants (ranked by ascending price) sets the actual electricity price based on current demand. If all gas-fired plants suddenly have to offer their electricity at higher rates, the entire supply curve shifts upward—and electricity prices climb as well.

Why Utilities Are Thriving

Utilities—which often double as traders—stand to gain from this. But what about their own costs? Don't higher energy prices eat into their profits? Not necessarily. In many cases, utilities have hedged their procurement costs, shielding themselves from the full impact of price surges. This softens the blow of rising expenses.

That said, no utility hedges 100% of its purchases (due to risk management and cost considerations), leaving enough "expensive" electricity to drive up prices elsewhere through feedback loops and arbitrage effects across different markets and time frames.

Utilities, then, are the unexpected double winners of the current crisis: they profit disproportionately from the hedged portion of their supply, while the unhedged portion—thanks to everyone else doing the same—can be offloaded without losses. This explains their current strength, though it also gives traders a reason to dump these stocks once prices normalize.

Basic Materials Rebound, Consumer Goods Lag

Beyond this, the resilience of the basic materials sector is noteworthy. Initially hit hard by soaring energy costs, investors now appear to be pricing in the ability of these companies to pass on higher expenses—particularly in chemicals, where stocks have staged a clear recovery (helping stabilize the sector overall).

Tech stocks, meanwhile, have fallen further, partly due to one-off effects (such as court rulings against Meta and YouTube/Alphabet). Durable consumer goods remain the worst performers, unsurprisingly, given mounting inflation risks.

PS: For more on the mentionedthree-sector strategy, check out the background details.