2 Lessons From the Iran War Shock That Strengthen the Long‑Term Case for U.S. Equities

At first glance, the Iran war appears to be horrible for stocks. A large percentage of the world's oil, nitrogen, and other critical commodities pass through the Strait of Hormuz, a major waterway heavily controlled by Iran.

Also, wars generally destroy the critical infrastructure needed to conduct business. Knowing that, it's understandable that some investors may want to sell stocks.

However, although the market sold off hard amid war fears, it recovered fast. Two key lessons from this shock should continue to strengthen the case to buy U.S. stocks.

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1. War can have significant effects on financial markets

Geopolitical conflicts are destructive to people directly and the infrastructure on which they depend, and understandably, we all want to avoid the suffering that brings.

However, as uncomfortable as this fact is, war can have complex economic side effects. Conflicts inevitably end up becoming catalysts for business. They increase demand for natural resources, which tends to boost commodity prices.

You may have learned in history class how the U.S. economy moved from a depression to a worker shortage in the run-up to World War II or how Ford Motor Company later retooled itself to produce a B-24 bomber every 63 minutes during that conflict.

The benefit to defense stocks like Lockheed Martin or RTX is an obvious byproduct of war. Also, in today's world, the military's dependence on technology could become a benefit to Nvidia or Palantir.

Nonetheless, the needs go beyond armaments and tanks, as demand for food, clothing, shelter, medical supplies, and other necessities will rise under such conditions. Thus, stocks as diverse as PepsiCo, Caterpillar, and Amazon could benefit.

Additionally, investors should not forget about the need for basic commodities to produce such goods. Knowing that, commodity producers such as Archer-Daniels-Midland or Chevron should also profit from the increased demand.

2. The U.S. is uniquely positioned to benefit

While modern weapons can travel long distances, geography still matters. The United States is physically far from many major conflict zones -- separated by oceans -- which reduces the immediate risk of direct damage compared to regions closer to the fighting. This relative distance can make the U.S. feel like a safer destination for trade and investment.

Amid the lingering dangers of sailing through the Strait of Hormuz, more oil tankers have made their way to the U.S. in search of oil, according to multiple sources. This can lead to increased oil flows to the U.S. and potential economic benefits, even while the broader situation remains dangerous and disruptive globally.

Still, the more profound effects should appear in the longer term, as the geographic separation makes the U.S. a uniquely safe place to conduct business activities. That likely means that manufacturing activities that companies took offshore in the prior decades could make their way back to the U.S., impacting the likes of Apple, Walmart, and even foreign manufacturers operating in the U.S., such as TSMC.

This could also further benefit the U.S.'s innovation-related industries that remained strong in peacetime. Even as companies took more manufacturing activity offshore, the world relies heavily on products invented in the U.S. This should further benefit Nvidia, along with companies like OpenAI, Google parent Alphabet, and Gilead Sciences.

The Iran war and U.S. equities

The conflict in Iran has developed into a humanitarian crisis that may persist. While the situation is deeply concerning from a global perspective, it does not necessarily constitute a basis for broadly reducing exposure to U.S. equities, especially if you have exposure to the S&P 500 (SNPINDEX: ^GSPC).

Historically, periods of conflict have been associated with increased demand for certain goods and services, which can, in turn, support the financial performance of some companies.

Also, the culture of innovation is particularly strong in the U.S. That should mean that any sell-off initially caused by war panic should turn into a buying opportunity for the stocks of the U.S.'s most critical companies.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Caterpillar, Chevron, Gilead Sciences, Nvidia, Palantir Technologies, RTX, Taiwan Semiconductor Manufacturing, and Walmart and is short shares of Apple. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.