Leeward Investment Team
Over the weekend, U.S. and Israeli forces launched coordinated air and missile strikes against Iranian nuclear facilities, missile infrastructure, air defenses, and key Islamic Revolutionary Guard Corps (IRGC) sites, reportedly killing roughly 50 senior leaders, including Supreme Leader Ayatollah Khamenei.
The operation, code-named Epic Fury, marks the culmination of an escalation cycle that began with the October 7th Hamas attacks, expanded through the Gaza war and regional clashes with Iranian-backed militias, accelerated after Assad’s fall in Syria, and intensified during last summer’s Twelve Day War, which featured the first sustained direct exchanges between Israel and Iran. The strikes quickly triggered retaliation, with Iran launching ballistic missiles and drones toward Israel and U.S. Gulf positions. Many were intercepted, though casualties have been reported on multiple sides. Armed conflict inevitably carries human costs and tragic consequences. Our role is not to evaluate policy decisions, but to assess what comes next and how the conflict may affect the global economy and financial markets.
Unlike Iraq and Afghanistan, these strikes are not expected to be followed by a ground invasion or occupation. The objective is narrower: to degrade Iran’s ability to project power and export instability by targeting military infrastructure, leadership, and nuclear facilities, leaving any political transition largely to internal dynamics.
History offers limited evidence that air campaigns alone produce regime change. NATO’s 78-day Kosovo campaign in 1999 succeeded only after Serbia believed a ground invasion was imminent. Libya in 2011 is a closer parallel, where airstrikes paired with local rebels toppled the regime but produced prolonged instability. Iran differs materially from both cases. It is a large, cohesive regional power with layered air defenses, hardened and dispersed assets, mountainous terrain, deeply buried facilities, and a population above 90 million. With no unified domestic opposition and uncertainty surrounding proxies such as the Houthis, Hezbollah, and IRGC affiliates, any regime change will likely be slow and disorderly.
Near term, the conflict’s duration will likely depend less on battlefield outcomes than on weapons inventories. The U.S. and Israel are attempting to degrade Iran’s missile and drone capacity, while Iran seeks to maximize damage before its stockpiles are exhausted. Any “mission accomplished” declaration will therefore reflect political timing and resource limits more than a definitive military outcome. Evidence that either side’s supplies are thinning would signal potential de-escalation or negotiations.
Broader U.S. equity markets were largely unfazed by these recent geopolitical developments, with the S&P 500 finishing roughly flat and technology stocks modestly higher. The muted reaction reflects limited direct exposure: Energy represents only about 3 percent of the S&P 500 Index, while assets most sensitive to geopolitical shocks, such as oil-linked currencies and gold, carry little weight in U.S. equities. As a result, the primary transmission channel to markets runs through oil rather than equities.
Iran accounts for roughly 3 to 4 percent of global oil supply, and the price of Brent crude oil has risen from about $73 per barrel last Friday to near $79 today. If prices stabilize near current levels, U.S. gasoline prices would rise only about $0.10 per gallon. The larger risk comes from escalation, particularly attacks on Gulf energy infrastructure or disruption of the Strait of Hormuz, a chokepoint that carries roughly 20 percent of global oil supply. A prolonged disruption could push crude toward $100 to $120 per barrel and raise gasoline prices by $0.50 to $1.00 per gallon.
Absent a sustained disruption in the Strait of Hormuz, broader economic effects should remain limited. Growth should hold steady, though inflation could finish the year closer to 2.3 percent rather than 2.0 percent. Energy and defense companies could see a near-term revenue boost, while the Federal Reserve would view higher energy prices as temporary. Higher fuel costs could also increase the likelihood of tariff rebate checks and additional defense spending to support operations or secure shipping lanes, modestly adding to federal debt and placing mild upward pressure on long-term interest rates.
While geopolitical risks have increased, portfolio positioning continues to be driven primarily by domestic market fundamentals. Recent market volatility has centered on concerns that rapid advances in AI technology may pressure software-as-a-service (SaaS) cash flows. We removed our AI overweight in November, helping shield portfolios from much of the recent software weakness.
Three weeks ago, we made additional adjustments, shifting toward “picks and shovels” exposure by maintaining semiconductor positions (SMH) while trimming software and rotating technology exposure away from hyper-scalers toward capex beneficiaries. We also modestly increased allocations to Health Care (ISRG) and Industrials (VIS), refined Financials exposure, and selectively added to best-in-class software holdings while remaining underweight the sector overall. Portfolio interest rate duration remains neutral, and we have modestly increased international equity exposure across both developed (VEA) and emerging markets (IEMG).
Markets today appear to be conflating AI’s exponential technological progress with the slower “S-curve” of real-world adoption, and the recent weakness in software may be somewhat overdone. At the same time, in this business, being early is the same as being wrong, so we remain patient and opportunistic as uncertainty clears. We will continue adjusting portfolios iteratively and will keep you informed as positioning evolves.
As always, please reach out if you would like to discuss your portfolio. We appreciate your continued trust and partnership.
Leeward Financial Partners
