US-Iran Conflict Escalation to Continue into Second Quarter: Market Implications to Watch

US-Iran Conflict: Potential Impact on Markets and Economy

The ongoing US-Iran conflict is likely to have a significant impact on global markets and economies, with the effects evolving in phases rather than playing out uniformly. According to Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, CAT3 AIF, the shift from short-term sentiment-driven volatility to deeper fundamental repricing will ultimately shape market outcomes.

Phases of Impact

The impact of the conflict is expected to unfold in three phases: April, May, and June 2026. In the April – Sentiment & Positioning Phase, the initial reaction will be driven by risk aversion, with markets correcting, volatility spiking, oil prices moving higher, and currencies weakening. The impact during this phase will be largely sentiment-driven, with investors repositioning portfolios in response to uncertainty.

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Transmission Phase

If tensions persist, the impact will begin to transmit into macro variables, with elevated oil prices reflecting in inflation expectations, currency pressures remaining, and financial conditions tightening. At a corporate level, input cost pressures will begin to build, and margin expectations will start getting revised. Market behavior will also become more selective, with dispersion across sectors and stocks increasing.

Fundamental Adjustment Phase

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A prolonged conflict will begin to have a more visible economic impact, with growth expectations revised lower, earnings estimates downgraded, and policy responses becoming more relevant. At this stage, markets will move from reacting to uncertainty to pricing in actual macro adjustments.

Inflation Outlook

Inflation is largely being dictated by energy prices and supply-side dynamics. If the conflict leads to sustained disruption and crude prices remain elevated, inflation could move above the 5 percent mark in the near term. However, a timely resolution would ease supply concerns, normalize energy prices, and help keep inflation more contained.

Equity Market Outlook

Puneet Sharma remains structurally positive on India, supported by domestic growth drivers, policy continuity, and improving capital formation. The Nifty 50 continues to be a strong proxy for this long-term growth trajectory. If geopolitical tensions ease in the near term, it could remove a key overhang and support a recovery in market sentiment. However, returns are unlikely to be linear, and investors should be prepared for intermittent volatility rather than a smooth upward trajectory.

Earnings Season

Q4FY26 is expected to be a relatively mixed quarter, with certain sectors experiencing margin pressures due to higher input costs and currency volatility, while others may continue to benefit from stable demand conditions. The impact of March volatility is more likely to reflect in management commentary, forward guidance, and cautious outlooks rather than sharply in reported numbers.

Indian Rupee

A large part of the panic may already be behind us, but the rupee will still remain highly sensitive to oil, capital flows, and geopolitical headlines. If the Iran situation cools and crude stabilizes, the rupee can recover further. But if oil remains elevated, it would still be prudent to avoid calling the all-clear too early.

RBI Commentary

The RBI is likely to maintain a balanced stance, acknowledging external risks while focusing on domestic stability. The emphasis will be on inflation trajectory, liquidity management, and currency stability. Rather than signaling aggressive policy shifts, the central bank is expected to retain flexibility and respond as conditions evolve.

Investment Themes

Rather than focusing on specific sectors, the more relevant theme in the current environment is the nature of market behavior itself. With global uncertainties and intermittent volatility, returns are likely to be uneven, making consistency and disciplined execution more important than directional or sector-specific positioning.