How has the Iran war changed the 2026 outlook?

Vaughan Nelson CIO and CEO Chris Wallis discusses how the Iran war has changed the economic outlook for 2026 and what the long-term implications may be, including for oil and energy prices through the northern hemisphere winter.

Podcast recorded on 8 April 2026

This is a lightly edited transcript from the podcast

Dan Hughes: Welcome to the Vaughan Nelson podcast. With me today is CEO and CIO Chris Wallis. Welcome, Chris.

Chris Wallis: It's good to be here, Dan.

Dan: All right, Chris, it's only been a couple weeks since we last recorded, but it feels like it may have been, you know, years away at this point. No shortage of things to talk about today, but let's just get right to it. You know, just what's set up? What do you see right now?

There's just so much action and so much news. It's hard to track. So, download it on us. Let's hear what you've got.

Chris: So let me go back and start where we started the year, which was, you know, we came in knowing that we were going to have an industrial recovery beginning in late 25. It was going to peak in the Q1 of 26, still remain positive growth into Q2, but slowing, and that inflation would start to bottom and remain relatively contained and probably sit, between two and a half and not quite 3% for the first half of the year.

And so most of our strategies were very much risk on coming into the year. And the idea would be, hey, at some point in the second quarter, you're kind of booking your gains in your more cyclical areas. And quite frankly, you're getting ready for a fairly significant increase in liquidity in the form of the treasury injecting money into the economy, fairly benign interest rate environment because inflation would have been well contained.

And then then at the same time, you're going to start to get rate cuts out of the Fed. And so you'd start to see more pro-cyclical activity out of kind of residential construction and similarities in the market and the economy. And unfortunately, the Iran hostilities really just turned all of that on its head.

So I'm looking at it and I think we've got four different cycles to focus on right now. One is the economic cycle, as I just laid out, which was kind of a peaking and rate of change at growth right now, and then continued positive growth into Q2 and mainly Q3 and but on a slowing basis. But now we're going to have a very different inflation environment.

So we have our economic cycle, now we have an inflation cycle. We're liable to see inflation in the US move through 4%, even with the ceasefire in the fall and energy prices. We'll still see inflation move through 4% in fairly short order. And unfortunately, the market can usually look through inflation if it's driven by oil, oil is one of the number one factors to drive inflation, but it's difficult to look through it if we're going to be increasing liquidity. And we're going to start increasing liquidity going into midterms on the short term, which is going to monetize the inflation that we're starting to embed in the system for a little bit longer period. So the market may start to be somewhat challenged to kinda look through this oil-driven increase in inflation, which means, you may not get the, the rate declines that we need to kinda spur that, uh, rate-sensitive areas of the economy.

Then we have this liquidity cycle. And as we were saying, liquidity was already peaking late last year, early this year. It was going to start to improve as we got rate cuts, and as we had the Fed injecting liquidity into the system, the counter to that now is a strong dollar, which we've experienced since the hostilities began, is a negative for liquidity. Rising bond yields and bond volatility is negative for liquidity, rising oil prices and inflation is negative for liquidity, and falling gold prices is negative for liquidity. So you kind of wrap all that together and you're like, okay, that's a net negative, near-term for the market as well.

And then the final one is the credit cycle, which we've been talking about the developing issues in private credit. While we don't think they're systemic and we think most of the losses are going to be on the private equity side and in private credit outside of liquid markets, those public companies that will be impacted, the market's already started to penalise, but that credit cycle is just beginning to turn and we'll continue to see issues develop as we have a lack of balance sheet capacity to refinance some of the more strained credits in 26 and 27.

So you kind of put all that together and it's a fairly tenuous environment over the very short term. We'll see if we get any real relief that the market can look through. We're a little bit insulated in the US because we're not dealing with the same level of energy shortages and ultimately what will be food shortages as we move into late 26, 27, that is going to be a real issue, in the rest of the world.

So, the setup right now is, what I would say is you want to look at short-term capital preservation, wait for the market volatility to redeploy capital, and don't necessarily count on a lower rate environment, or you may get a little bit of incremental liquidity improvement, but not material liquidity improvement, because unfortunately, the hostilities we kicked off in Iran are just not, they're not something you can go, you can reverse course and just go back to where we were before.

Dan: All right. And we would be remiss here if we didn't just at least touch on energy today. It's been every bit of rollercoaster. The Iran conflict, seems like it's a bit of a whipsaw here. When things finally settle out, do you see energy these higher energy prices sustained, or do you think they're going to return back to pre-conflict level?

Chris: I don't think we're going to go back to pre-conflict levels over the short term for two reasons. One, the prices you're seeing on your Bloomberg terminal, are not the prices people are paying. They're paying much higher prices to actually get crude oil and products to their shores.

And so even if you looked at the forward curve pre the announcement of the ceasefire, realistically, WTI was probably pricing in $75, $80 oil for the next 12 months, and if you wanted to actually get oil to your shores, you're paying well over $100 a barrel.

And then when you look at what was embedded into equity prices within the equity markets, it was along that $70, $75 oil. So the market wasn't even pricing in higher prices yet. It was trying to look through it. Unfortunately, I think what's happening is the real physical shortages that are going to manifest because the products that were ordered and shipped for March deliveries made it. The ships that are still caught in the Strait of Hormuz were really for April deliveries, so we're going to start to see these supply chain issues manifest for the back half of April into May.

Even with the ceasefire, you may get a few ships out, but I don't know how many ships are going to go back in without some permanent resolution, so you're still going to have this disruption in the supply chains. And then we've got a legitimate, loss of barrels from damaged infrastructure and shut-in production, and that's not going to come back for a while. And clearly, if the US is just going to withdraw from the region, there needs to be a higher risk premium for goods passing through that part of the Middle East, and any withdrawal from the US is clearly a net negative from a stability standpoint, you look at our allies in the region, they're our allies because we provide a defence umbrella, and I think we've demonstrated we can't protect their assets, so they may need to go cut other deals with other people.

So I think there's going to be a risk premium. So if we were at $65 oil before, are we 80, 85 without disruptions, with everything back online, perhaps. Even with the big decline in energy prices today, given the ceasefire announcement, on a year-over-year basis, you're still talking about prices that are going to be up 50% plus on, a year-over-year for raw molecules. Never mind processed molecules will probably still be up, you know, 75 to 100%.

So we're going to start to see that manifest itself in, ability for consumers to spend, meaning they're just going to lose some of the wallet share. It's going to go over to energy prices. Then we’ve got to look at where we are kind of in the shoulder season.

And so LNG is priced probably on about a three to four-month lag from spot prices because there's contracted prices. And so we're going to start to see that show up, later May, June. That's going to be in the injection season for Europe.

So Europe's going to be bidding aggressively to be able to get the LNG and get the natural gas that they need for their winter heating situation. And unfortunately, that's going to be bidding away from other consumers in Asia and other countries in general, which means probably sustained higher prices, at least through the back half of this year. To what degree it's going to be able to be looked through by the market, you know, that'll be dictated by politics and liquidity. But there's no question on a real basis what people are actually going to pay for their heating cost in the winter outside of the US. They're going to be paying higher prices. And if we keep the physical disruptions, meaning we're not going to flow product, then I think you're going to see much higher energy prices because the only way we're going to balance a physical market is by killing demand.

And so, that's kind of what I'm watching for. And the longer that these supply chains aren't moving, and I think we're going to be measuring this in weeks. So we don't have months. We have four to six weeks to really get this straightened out. And if we don't, then this is going to be with us into 2027, for sure.

Dan: All right. Good. Well, good to have you back, thanks for the insights here, and we'll get you soon.

Chris: Sounds good.