Businesses are facing rising costs during the Iran war, and economists expect more strains ahead

Nearly half of NABE survey respondents said the U.S.-Israel war against Iran is hurting operations, while 54% reported higher energy costs and more than two-thirds saw steeper material expenses, the highest since July 2022. Nearly a quarter plan to scale back investment and hiring over the next six months, and 50% now see a more than one-in-four chance of a U.S. recession within a year, up from 44% in January. Businesses are passing costs through to consumers, with 48% already raising prices and 16% expecting further increases over the next six months.

Analysis

The market is likely underpricing the lag between headline geopolitics and real-economy margin compression. Energy is the first-order shock, but the second-order hit is that higher freight, fertilizer, and intermediate inputs squeeze working capital simultaneously, so even firms with stable top-line demand will see cash conversion deteriorate before earnings estimates visibly roll over. That tends to show up first in sectors with low pricing power and long inventory cycles: transport, chemicals, building products, and discretionary retail.

The more interesting signal is the drop in willingness to hire and invest. When management teams cut capex and headcount in response to input-cost volatility, the effect compounds over 2-3 quarters through slower shipment volumes, lower order visibility, and weaker supplier orders. That makes this less of a pure inflation story and more of a growth-air-pocket story: the same shock can support energy equities while simultaneously compressing multiples in cyclical industrials and consumer names.

Consensus seems to be focusing on current sales resilience and near-term inflation pass-through, but that misses the asymmetry in profit margins. Passing costs to customers works until volumes break; when it does, firms with the weakest balance sheets and least brand power get hit twice—first by margin erosion, then by demand destruction. The recession probability shift matters because it can trigger a de-risking loop in credit, small caps, and transport-heavy industries before macro data confirm the slowdown.

The main reversal catalyst is not demand improvement but supply de-escalation: a durable easing of Strait of Hormuz risk or a diplomatic path that takes the extreme energy-risk premium out of crude. Short of that, the next 60-120 days likely favor higher realized input costs and softer earnings revisions, even if headline inflation prints stay noisy and energy producers continue to look deceptively strong on the surface.

Key Decisions for Investors

• Short XLI vs long XLE for the next 1-3 months: industrial and transportation margin pressure should lag oil upside, while energy retains immediate cash-flow torque. Use a modest sizing because the trade can whipsaw if geopolitical risk premium fades suddenly.
• Buy puts on XLY or short KSS/M with a 2-4 month horizon: lower-income consumers are the weakest link once fuel and shipping costs are pushed through to shelf prices. The risk/reward improves if price increases start to hit volume rather than just margins.
• Short freight-sensitive transport exposure via IYT or individual names with thin pricing power over 6-12 weeks. The thesis is that fuel cost inflation and softer shipment growth will show up in guidance before headline macro data deteriorate.
• Long integrated energy names with strong balance sheets such as XOM/CVX on any pullback, but hedge with downside on Brent or call spreads. The trade works as a geopolitical hedge, but upside is already crowded if the market prices in sustained disruption.
• Pair long fertilizer-adjacent input beneficiaries against short ag-linked margin users only tactically; the better expression is through equities with direct pass-through capability. If crude retraces quickly, cut the long side first because the risk premium is the most fragile component.