US Market Takes Upper Hand Amid Iran War as International Stock Rally Reverses

Key Takeaways

• After outpacing US stocks in 2025, international markets have tumbled since the start of the Iran war as investors seek refuge in US-dominated assets.
• Investors see American energy independence as a reason to buy US stocks, but soaring oil prices could have harmful economic ramifications globally.
• A prolonged conflict in the Middle East could also wreak havoc on the American economy, as the country’s job market remains weak and inflationary pressures loom.

In a relatively rare occurrence, international stocks bested their US counterparts in 2025. But since the start of the Iran war, that dynamic has shifted as global stocks stumbled.

International markets had a blockbuster 2025. The Morningstar Global Markets ex-US Index finished the year up 28.3%, outpacing the US market’s 15.9% gain. The Morningstar Europe Index increased by 31.8% last year, while the Asia Pacific Index rose 24.3%. The Morningstar Emerging Markets Index—which includes markets in countries rapidly transitioning into industrial and modern economies like Brazil, Russia, India, and China—gained 26.5%.

“For the last several years prior to 2025, the US market has trounced nearly all international markets from a performance perspective,” says Morningstar Wealth chief multi-asset strategist Dom Pappalardo. “Non-US outperformance feels unusual, as it has not occurred in quite some time and has never been seen by newer investors.”

The Iran war has flipped that dynamic. The US market is now outpacing international markets, thanks to strong trust in the US dollar and America’s energy independence amid ongoing disruptions to oil access in the Middle East. However, a long-lasting conflict could pose a greater threat to markets across the globe, according to Pappalardo.

International stocks’ dominance in 2025 was mainly driven by high valuations for large-cap US stocks, especially in the tech sector. Those climbing valuations fueled investor skepticism, pushing them to shift toward relatively cheaper markets in Europe, Asia, and Latin America, Pappalardo explains. He says a weaker US dollar and stronger foreign currencies also boosted international returns.

Since the start of the Iran war on Feb. 28, US stocks have proved resilient and are outperforming international markets, falling 2.8%, compared with an 8.0% decline in the Global Markets ex-US Index. Pappalardo says investors are seeking safety in these stocks partly because of strong trust in US currency. “The US dollar is again appreciating as part of a ‘flight to quality’ trade, where investors are seeking the relative safety of USD-denominated assets,” he says.

US Energy Independence Widens Gap vs. International Markets

Investors also have greater confidence in US stocks because of the country’s energy independence and the belief that it’s better-positioned to weather disruptions to Middle East oil access, explains Pappalardo. European and Asian countries with comparatively greater dependence on Middle East oil reserves have suffered double-digit market losses since the beginning of the war. The Europe Index is down 8.06% since the war broke out, while the Asia Pacific Index has lost 8.51%.

The current US outperformance is relative, explains Pappalardo, who warns a long-term conflict will likely have harmful economic ramifications for both domestic and international markets. “The US may eventually fare better, but it would very likely be a case where US markets just decline less than global markets,” he says. “While this still would represent relative outperformance, it could still be painful for the US in absolute performance terms.”

US share prices remained elevated in 2025, while global stocks faced broad undervaluation, creating openings for key emerging markets like Korea, which soared more than 85% in 2025. Mexico climbed 44.8% and South Africa gained 36.6% last year, helped in part by rising gold prices. In addition, Morningstar’s Europe and China indexes each rose roughly 30%.

Investors are now making choices based on which countries will see the greatest economic fallout from the conflict, says Pappalardo. Some have already started to experience blowback. Since the start of the war, Korea and South Africa’s markets have each fallen roughly 14.0%, Mexico has lost 10.5%, the Europe Index is down 8.3%, and the Canada Index has lost 4.6%. The China Index has fared slightly better than US stocks since the war started, down about only 2%.

Companies in the tech sector (many of which have fallen into what Morningstar deems undervalued territory) have also recently reported strong earnings growth and 2026 guidance, causing investors to turn their sights back to the domestic market, Pappalardo says. “As international markets rallied hard in 2025 and early 2026, many of their valuations became stretched,” he explains. “In contrast with what happened in 2025, some investors are reallocating back to the US stocks and taking profits on international allocations.”

Long-Term Economic Threats

Pappalardo thinks a prolonged war would exacerbate ongoing weakness in the United States. That economic strife could filter into the stock market. “Most of the macroeconomic data released in 2026 has been trending weaker, especially regarding the labor markets,” he says. “Should this type of weakness continue, it could have a negative impact on US equity market performance, as recession fears will grow.” February’s job data, collected prior to the start of the Iran war, showed weaker-than-expected hiring figures, plus an increased unemployment rate.

A lasting war would also keep energy prices elevated, which Pappalardo says would cause “meaningful economic damage” for consumers everywhere, since input prices for goods and services would rise. February’s Consumer Price Index report showed moderate inflation. Economists warned that price growth is likely to tick up in March and April, since that data will reflect the oil price spike.