Markets have been resilient to volatility created by the Middle East conflict, but the effects on energy costs, supply chains and inflation are still working their way through the system.

On April 15, Sadiq Adatia, Chief Investment Officer, BMO Global Asset Management, moderated a discussion examining how markets have held up, where inflation risk is building and factors that companies with complex supply chains should be watching. The panel featured:

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  Katherine Krantz, Managing Director, Portfolio Strategy, BMO Capital Markets

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  Robert Kavcic, Director and Senior Economist, BMO.

Listen to the Markets Plus podcast based on the discussion:

Here are some of the key themes from their conversation.

While the conflict in Iran may have prompted some investors to reassess the market, Katherine Krantz said her broader investment outlook on 2026 hasn’t changed much. Her team entered the year expecting improving leading indicators, stronger business spending and cyclical leadership. When oil prices jumped because of geopolitical tensions, they revisited that positioning but didn’t find cause to make a significant adjustment.

One reason her broader outlook has held steady is that inflation was already a concern before the conflict began. In her view, this cycle never went through the kind of recession that would normally clear out excess capacity in labor markets and the broader economy. That leaves less room for stimulus. In her view, the increase in oil prices only adds to that risk.

She said she’s encouraged by how the market has responded to news of a ceasefire. Rather than turning defensive, investors keep going back to the same economically sensitive sectors that were already leading before the disruption. Early on, Krantz and her team held the view that if the conflict didn’t drag on, you were better off staying positioned for the recovery.

Still, Krantz didn’t downplay the long-term implications of the conflict. “There’s been a lot of destruction of infrastructure that's going to take time to come back online,” she said.

Robert Kavcic said North America is better positioned to handle an oil shock than most historical comparisons would suggest. The U.S. economy came into the conflict with solid underlying momentum, and both the U.S. and Canada have grown far less sensitive to energy prices, as heavy industry gave way to services, finance and technology. The fact that both Canada and the U.S. are net exporters of oil and natural gas adds another layer of insulation.

“The economy in North America, especially the U.S., is less sensitive to oil prices than in the past,” he said. “The U.S. economy is about a third as energy intensive as it would have been in the 70s, when these shocks would really quickly trigger recessions.”

In Canada, higher oil prices are probably a net positive overall, but Kavcic said the gains are not spread evenly across the country. Alberta and Saskatchewan benefit directly, while central Canada absorbs the higher costs without seeing much of the upside.

Before the conflict, the Bank of Canada had been considering rate cuts. With that now off the table, he said, policy has effectively tightened at the margin. Even without a rate cut, bond markets have adjusted to the new environment by betting against near-term easing.

Actual benchmark rate hikes would require higher energy costs to spread broadly into core inflation, and core trends in Canada were already improving shortly prior into the conflict. His base case is that the Bank of Canada stays on hold through the year.

Higher energy costs feed into transportation, which in turn drives higher consumer costs for things like food. Businesses that may struggle in this environment are those that can’t easily absorb higher costs. Supply chains are also under strain, as higher insurance costs and shipping disruptions place added pressure on a global system that’s still recovering from the pandemic.

Krantz said inflation is the risk she’s watching most closely, and not just because of oil. The Federal Reserve was already becoming more hawkish before the conflict began, she explained. If higher energy costs pull up core inflation, she said, they will add to the pressures that were already building.

The U.S. fiscal position is another risk worth watching, Kavcic said. A budget deficit running at 6% of GDP in a strong economy may look manageable for now, but it leaves much less room to respond when conditions eventually turn.

Both Krantz and Kavcic found reason for optimism in an unsettled environment. Krantz cited the stimulus already in the pipeline and the strength of leading indicators coming into the conflict. Kavcic said the fundamentals underpinning U.S. equities, including solid growth, earnings momentum, disinflation and the AI investment cycle, have not gone away.

“If we can get through the oil price shock, those underlying fundamentals are still there,” he said.