Many global markets have enjoyed multiple years of double-digit growth as innovations in artificial intelligence have sent high-tech stocks soaring, but has the recent return of geopolitical uncertainty created a significant headwind in 2026? 

Between the launch of OpenAI's ChatGPT in November 2022 and the end of 2025, the S&P 500 rallied 70%, helping investors significantly grow their portfolios. Global markets have also soared in recent years, with the FTSE 100 growing 21% in 2025 and China's Hang Seng index recording growth of 27.8%. 

However, much of this growth occurred after widespread investor sell-offs in a high-inflation environment caused by the post-pandemic recovery and the economic shock of Russia's invasion of Ukraine. Now, as geopolitical headwinds continue to grow in the Middle East, could investors be set for a return of high inflation and weaker growth? 

Geopolitical Uncertainty and Inflation

The conflict in Iran has created significant challenges in the Federal Reserve's ambitions to bring inflation back towards its 2% target. Following the closure of the Strait of Hormuz, a busy shipping lane that accounts for around 20% of global oil flows, the soaring cost of oil, which has reached highs of $167 per barrel, has created significant energy pricing pressures. 

While a tentative ceasefire appears to have been reached, the impact of the closure and lingering geopolitical pressures is likely to place inflation under the microscope for the months ahead. 

As escalations in Iran continued, the Organization for Economic Cooperation and Development forecasted all-items inflation in the US to reach 4.2% for 2026, a level that could inspire a hawkish reversion for the Fed's monetary outlook.

The impact of high inflation on markets is strong because it can not only cause widespread fear among investors but is more likely to lead to interest rate hikes that can harm the growth prospects of companies.

"When inflation gets out of control, things can get bad very quickly, which is why interest rates are increased to cool down the economy and reduce inflation,” explained a Wealthify commentary on the impact of inflation on interest rates. "The central bank’s job is to find the interest rate that keeps inflation at the sweet spot of 2% on average."

"People deposit and borrow money from commercial banks, which act as financial intermediaries; your bank deposit will be someone else’s loan, and vice versa. In a similar way, commercial banks deposit and borrow money from the central bank."

With leading banks like JPMorgan already forecasting that the Fed's next move is most likely to be a 25 basis point hike in 2027, we could see some of the whirlwind growth of the S&P 500 become undone in 2026.

What's Next for the S&P 500?

Following the announcement of a two-week ceasefire in Iran, the S&P 500 surged 2% overnight in a timely reminder of the resilience of US markets at a time when the AI boom is still a key driver of confidence. 

Optimism has also been building that the Federal Reserve could revert to its easing cycle in rolling out more rate cuts in 2026. 

However, with UBS Global Wealth Management recently lowering its S&P 500 predictions for 2026 prior to the ceasefire agreement to 7,500 from 7,700 from its year-end target and 7,000 from 7,300 for its mid-year target, it's clear that the outlook for the index is heavily dependent on peace in the Middle East.

Perhaps the most important metric following the announcement of a ceasefire in Iran was the collapsing price of oil, which fell around 13% to $94.80 for Brent crude. 

Given that energy prices were a leading contributor to inflation in the US in recent weeks, a reversion to pre-conflict prices would be the most decisive factor in assisting the Fed in achieving its 2% target. 

With inflation reaching 2.4% in February, the Federal Reserve's rollout of interest rate hikes had helped to cool the rising cost of living to some of its lowest levels since 2022's peaks of 9.1%. 

The prospect of the OECD's forecast of 4.2% becoming a reality would significantly slow the US economy, forcing consumers to avoid spending. Should interest rates be hiked to control higher inflation, business borrowing would also slow down, harming the growth prospects of firms. 

How Inflation is Changing Wall Street

The changing geopolitical climate and fears over a return of high inflation is already contributing to a turnaround in investor preferences in recent months. 

While high-tech stocks had been driving growth in the S&P 500 throughout recent years, Roundhill's Magnificent Seven ETF (MAGS) has drifted around 14% from its peak value in recent months as investors begin to question the sustainability of the sector's sky-high valuations. 

One of the most consistent plays by investors in recent months has been gold, which could become a key consideration should peace between the US and Iran calm inflation to the point where interest rate cuts become more likely. 

But we should see more investors become conscious of diversification as the full impact of inflation is felt. 

Although a ceasefire in Iran is likely to drive oil prices lower, the Consumer Price Index (CPI) for March and April will help to uncover the energy price shock that's to be absorbed by investors. In quantifying the rise in living costs, investors can gain a better understanding of how far away the Fed's 2% inflation target really is.

Disclosure: On the date of publication, Dmytro Spilka did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer. Dmytro Spilka does not intend to make a trade in any of the securities mentioned above in the next 72 hours.

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