How the S&P 500 Reacts to Wars and Major Conflicts: Short-Term vs Long-Term and Why Crude Oil Matters

War headlines can move markets quickly. The bigger question is whether the conflict changes earnings, inflation, rates, or recession risk.
In many cases, the initial shock fades once uncertainty turns into information. When the shock does not fade, crude oil is often part of the reason.

Historically, the S&P 500’s initial reaction to major geopolitical shocks is often a modest drawdown that can recover within weeks. The larger risk is not the headline itself, but whether the conflict drives a sustained oil spike, higher inflation, and tighter financial conditions that raise recession odds.

Key takeaways

• Across many post-World War II geopolitical shock events, the S&P 500 has often seen relatively modest drawdowns that typically recover in weeks when the conflict remains contained. (LPL Research)
• Long-term equity outcomes tend to track the usual drivers such as earnings, valuations, inflation, and interest rates. War can matter, but often indirectly through the macro backdrop. (J.P. Morgan Private Bank)
• Crude oil is a common transmission mechanism that can turn geopolitics into inflation pressure, policy pressure, and recession risk when price spikes persist. (U.S. EIA)
• The worst market outcomes tend to be tied to prolonged oil shocks and macro stress, not just the day the headline hits. (Federal Reserve History)

The typical short-term market pattern around war headlines

Markets do not fear bad news as much as they fear uncertainty. That is why major conflict headlines can trigger a quick risk-off move,
then stabilize once traders can estimate scope, duration, and economic spillover.

One widely cited event study covering post-World War II geopolitical shocks found an average one-day reaction near negative one percent,
an average peak-to-trough drawdown around the mid single digits, an average time to bottom of roughly three weeks, and an average recovery
time of roughly six weeks. These are averages, not guarantees, and dispersion is wide. The key idea is that many shocks are processed faster
than most traders expect when there is no sustained macro damage.

Long-term perspective: war does not automatically mean poor stock returns

Over longer windows, equity returns are anchored to earnings growth, valuation, inflation, and interest rates. Major wars can coincide with
strong returns or weak returns depending on the macro regime and policy response.

Historical summaries of U.S. capital markets during major wars have shown that large-cap equities often delivered positive returns across
several conflict periods, while bonds could lag due to inflation and borrowing dynamics. The takeaway is not that war is “bullish,” but that
the market’s longer-term path is usually driven by economic conditions more than headlines.

The stock market has often produced solid returns during major wars.

A CFA Institute analysis using the S&P 500 for large-cap stocks (and defining “war-time” as the period starting four months before a war and continuing through it) showed positive large-cap returns during World War II, the Korean War, the Vietnam War, and the Gulf War, while bonds tended to underperform their longer-run averages during wars (inflation and borrowing matter).

A separate First Trust dataset using broad U.S. total-market returns also showed positive annualized returns across major wars (World War II, Korea, Vietnam, Gulf War, Iraq War), reinforcing the idea that war headlines don’t necessarily dominate long-term equity outcomes.

Why crude oil matters so much

Oil is globally traded and priced at the margin. In the short run, both supply and demand can be slow to adjust, which means price can move a lot
when disruption risk rises. That move can include a risk premium that reflects uncertainty, not just barrels lost.

For traders and investors, the distinction that matters is a fast spike that fades versus a sustained rise that tightens financial conditions.
Sustained oil strength can behave like a tax on consumers and margins, push inflation expectations higher, and increase pressure on central banks.
That is how geopolitics can become macro.

Examples of how crude reacted when conflict escalated

Oil is globally traded, and prices can jump on:

• actual supply disruptions
• the risk of future disruption
• fear-driven risk premiums

Oil shock regime: the Arab Oil Embargo

The early 1970s episode is a classic example of conflict-related energy stress with lasting macro consequences. Oil prices surged dramatically
during the embargo period, and the inflationary aftershocks contributed to a difficult environment for equities.

The ultimate “macro + war” outlier: 1973

J.P. Morgan’s data shows the 1973 Arab oil embargo as a standout: the 12‑month real S&P 500 return after that shock was deeply negative (they cite -37% real return over the 12 months after the embargo in their framework).

This is why traders should separate:

• War headlines (often short-lived market impact)
  from
• Oil shock regimes (can reshape inflation, rates, and valuations)

1990: Iraq invades Kuwait — oil spikes fast

Brent prices surged sharply in late 1990. FRED’s Brent series shows Brent above $40 in late September and early October 1990 (for example, $40.75 on 1990‑09‑24, and $41.15 on 1990‑10‑11).

This is a good “classic template” for how oil risk can suddenly become inflation/recession risk when supply fears rise.

Modern era surge then mean reversion: Russia and Ukraine

In early 2022, Brent crude spiked sharply around the invasion window and later retraced as markets adjusted supply expectations and demand conditions.
This is a useful reminder that an oil spike can be intense without becoming a permanent regime shift.

Worst cases that played out, and what they had in common

If your goal is to understand the downside, don’t just ask, “How bad was the headline?”

Ask:

• Did markets face a second shock (oil, inflation, recession, credit)?
• Was the market already weak (bear market underway)?
• Did policy tighten into it (rates rising, liquidity falling)?

Selected “worst case” drawdowns after major shock events

The table below uses First Trust’s compilation of major geopolitical shock events (U.S. market-cap weighted universe via Ken French/CRSP), showing max drawdowns and recovery timelines after the event date.

The table below highlights selected geopolitical shock events and the market’s drawdown and recovery path, based on a compiled dataset of major events.

Event	Event date	One-day return	Max drawdown after event	Days to bottom	Days to recover
Pearl Harbor attack	12/07/1941	-4.15%	-20.34%	142	304
Iraq invades Kuwait	08/02/1990	-1.19%	-17.47%	71	187
U.S. terrorist attacks	09/11/2001	-5.01%	-11.89%	11	30
North Korea invades South Korea	06/25/1950	-5.27%	-12.16%	19	59
Cuban Missile Crisis	10/16/1962	-0.31%	-6.68%	8	17

One outlier often cited for severity is the 1973 oil embargo era because the oil shock, inflation, and recession dynamics were persistent.

Two crucial points jump out:

1. Even when drawdowns were large, markets often eventually recovered (the timing is what changes).
2. The ugliest outcomes tend to show up when geopolitics overlaps with macro stress, especially energy and inflation.

Could there be additional stress come a credit issues revolving around AI, or anther banking crisis? Something to watch, for sure.

What matters most for traders: “contained conflict” vs “macro conflict”

Here’s how I’m approaching this conflict in Iran, and what I’m watching for from a practical standpoint:

• What you typically see:
• quick VIX spike
• short-lived selling
• sector rotation (energy/defense up, travel down)
• recovery once escalation risk fades
• This aligns with the “average drawdown / quick recovery” pattern found across many events.

Scenario 2: Conflict becomes macro (oil + inflation + rates or something else)

Red flags:

• crude remains elevated for weeks/months
• inflation expectations rise (check out the recent PPI data that came out!)
• yields rise (or credit spreads widen)
• consumers and margins get squeezed
• recession odds climb

EIA’s explanation of oil risk premiums and the historic link between political disruptions and major oil shocks helps explain why this scenario is the one that can actually damage the market’s longer-term trajectory.

What Sectors Tend to Perform Best During War

When geopolitical conflicts escalate, investors often rotate capital toward industries that benefit from rising defense spending or higher commodity prices. These shifts do not happen every time, but history shows certain sectors tend to attract attention during periods of geopolitical tension.

Defense contractors are among the most obvious beneficiaries. Governments frequently increase military spending during periods of conflict, which can boost revenue expectations for companies involved in aerospace, weapons systems, and military technology.

Energy stocks are another group that often responds positively. If conflict threatens oil supply routes or production regions, crude prices can rise quickly. Higher oil prices tend to benefit companies involved in oil exploration, production, and energy infrastructure.

On the other side of the spectrum, sectors tied closely to consumer spending and travel can sometimes struggle when conflict escalates. Airlines, tourism-related companies, and other discretionary industries may face pressure if fuel costs rise or global travel slows.

For traders, the takeaway is not that war automatically creates winning sectors. The key is watching how capital rotates when geopolitical risk increases and how those moves influence the broader market.

Why Markets Often Overreact to War Headlines

Short-term market reactions to geopolitical events are frequently driven by emotion rather than fundamentals. When a major conflict dominates news headlines, traders often respond quickly in an attempt to reduce risk.

These reactions can create sudden spikes in volatility and sharp market moves. However, the initial selloff is not always the final outcome.

Once the first wave of selling passes, investors begin evaluating the actual economic impact of the conflict. Questions such as oil supply disruptions, global trade risks, and central bank responses become more important than the headlines themselves.

If those factors remain contained, the market often stabilizes and resumes trading based on earnings expectations and economic data.

For swing traders, this dynamic reinforces an important principle. The goal is not to predict every headline. The goal is to watch how price reacts and determine whether the market is confirming the fear that initially drove the move.

Trading takeaways: focus on price, and watch oil for macro risk

If you swing trade, the edge is rarely in predicting the headline. It is in trading how price reacts, how volatility behaves, and whether the macro inputs
are changing under the surface. When oil stays bid for weeks, the risk profile changes.

Here at SharePlanner I have always emphasized this idea in the context of geopolitical headlines: let the market show its hand, size risk appropriately, and avoid assuming the first move is the only move.

A war headline checklist for swing traders

• Start with S&P 500 structure and key levels. Identify whether price is holding support or breaking down.
• Watch volatility behavior. A spike that fades can signal contained risk, while persistent elevation can signal broader stress.
• Track crude oil and energy leadership. Sustained strength can be a warning that the shock is turning macro.
• Respect gaps and wider ranges. Size down when needed and keep your risk defined.
• Let confirmation lead. Many traders get chopped by assuming the first reaction is the trend.

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Frequently asked questions

Does the stock market go down when war starts?

Sometimes, but not always. Many geopolitical shocks have produced modest drawdowns that recovered within weeks when the conflict stayed contained.
The larger risk tends to show up when the conflict drives sustained oil inflation and recession pressure.

How long does the S&P 500 usually take to recover after geopolitical shocks?

Outcomes vary by event and by the macro backdrop. In many historical shock events, recoveries occurred within weeks, not years, particularly when oil and policy
conditions did not deteriorate materially.

Do oil prices always rise during wars?

Not always, but oil often becomes more volatile because traders price uncertainty and potential disruption risk. The economic risk increases most when higher oil prices
persist long enough to pressure inflation and consumer spending.

What is a common historical example of conflict leading to a lasting market problem?

The 1973 to 1974 oil shock is a major example because oil prices surged dramatically and the macro aftermath contributed to a difficult inflation and growth environment.

Additional sources worth checking out:

• LPL Research on geopolitical shocks and market reactions:
  lpl.com
• J.P. Morgan Private Bank on geopolitical shocks and markets:
  privatebank.jpmorgan.com
• U.S. Energy Information Administration on crude oil markets and geopolitics:
  eia.gov
• Federal Reserve History on the 1973 to 1974 oil shock:
  federalreservehistory.org
• FRED Brent crude oil series (EIA sourced):
  fred.stlouisfed.org