Financial markets could face a sudden selloff if the U.S. military initiates an attack on Iran. Economists caution that a sharp spike in oil prices could further strain a global economy already challenged by U.S. tariffs under President Donald Trump.

According to data from prediction market Polymarket, the likelihood of U.S. military action against Iran before July was 63%, down from 82% earlier in the week but still markedly higher than the 35% probability before the recent escalation, as quoted on Yahoo Finance.

Tariffs and Global Growth Weigh on Sentiment

Middle East tensions add to investor worries already heightened by Trump’s trade policies. The World Bank recently cut its global growth forecast for 2025 by 0.4 percentage points to 2.3%, indicating tariffs as major headwinds for nearly all economies.

Franklin International Core Dividend Tilt Index ETF (DIVI Quick QuoteDIVI - Free Report) , which yields 3.81% annually, may offer a safer exposure, in this case. The fund is up 18% so far this year.

Stocks at Risk Despite Recent Highs

With major U.S. stock indices hovering near record levels, some investors worry that equities may be especially sensitive to further geopolitical turmoil. Chuck Carlson, CEO of Horizon Investment Services, noted that an initial market dip is likely if the United States becomes more deeply involved in the conflict, as quoted on Yahoo Finance.

However, he also suggested that a faster escalation could result in the conflict’s faster resolution. Seeking exposure to quality ETFs like iShares MSCI USA Quality Factor ETF (QUAL Quick QuoteQUAL - Free Report) makes sense.

Flight to Safety

Growing fears of a broader war in Iran led investors to seek safe havens, causing U.S. Treasury yields to drop. The U.S. dollar strengthened against both the Japanese yen and Swiss franc — traditional safe-haven currencies.

Invesco DB US Dollar Index Bullish Fund (UUP Quick QuoteUUP - Free Report) added about 1.3% over the past five days (as of June 18, 2025). SPDR Gold Shares (GLD Quick QuoteGLD - Free Report) is another safe haven bet, while dividend-growth ETFs like SPDR S&P Dividend ETF (SDY Quick QuoteSDY - Free Report) also offer safer exposure.

Oil Prices Could Surge in a Worst-Case Scenario

Barclays analysts warned that if Iranian oil exports were cut in half, crude could climb to $85 per barrel. In a worst-case scenario involving a broader war, prices might soar to $100. Brent crude was recently trading around $76, as quoted on yahoo finance. United States Oil Fund LP (USO Quick QuoteUSO - Free Report) jumped 11.2% over the past five days.

Citigroup economists also flagged the risk of a negative supply shock, warning that higher oil prices would dampen global growth and boost inflation — adding pressure on central banks already grappling with trade-related economic stress, as quoted on yahoo finance.

Why the Strait of Hormuz Matters

As President Donald Trump considers whether to support Israel in its ongoing strikes against Iran’s nuclear facilities, a key concern remains: how might Iran retaliate? The central question lies in the narrow but critical waterway — the Strait of Hormuz.

The Strait of Hormuz is a vital maritime chokepoint linking the Persian Gulf to the Arabian Sea and international waters. It lies between Iran to the north and Oman to the south, and is only 35 to 60 miles wide at its narrowest points. Despite its size, it is the world’s most crucial passage for fossil fuel exports.

Roughly 20% of global oil and seaborne natural gas shipments pass through the strait, making it indispensable for global energy markets. As such, any disruption in the area can cause considerable economic downside.

Defense Stocks Benefit from Geopolitical Risk

Defense stocks have also seen gains amid rising conflict. The S&P 500 Aerospace and Defense Index reached record highs last week, capping a 30% rebound following losses triggered by Trump’s April 2 "Liberation Day" tariff announcement. One can keep an eye on iShares U.S. Aerospace & Defense ETF (ITA Quick QuoteITA - Free Report) .