Executive Summary | Three Core Convictions | United States | China | Eurozone | Japan | Investment Implications
Iran War Impacts Energy Prices and Consumer Confidence
2026 was poised to be the year when the Eurozone would narrow the real GDP growth gap with the United States, thanks to rising real wages, normalized energy markets, and fiscal stimulus. Then the United States and Israel attacked Iran, unleashing a global surge in energy prices that is likely to hit Europe harder than any other major developed economy.
Entering 2026, benchmark natural gas prices had declined from a peak of over €300/MWh after Russia invaded Ukraine to under €30/MWh. While a majority of Eurozone economic activity is in the service sector, the decline in energy prices would have boosted industrial activity and helped ease the cost of living for households. After the attack on Iran, however, prices more than doubled before returning to ~€42/MWh by late June (Exhibit 10). The energy price surge had global implications—but Europe is feeling these challenges more acutely due to its dependence on imported energy.
EXHIBIT 10
Natural Gas Front-Month Futures Prices Have Risen ~33% since the US and Israel Attacked Iran
As of 22 June 2026
Benchmark natural gas refers to the Virtual Trading Point Netherlands Title Transfer Facility.
Source: Bloomberg
Consumer confidence had also been recovering slowly before the Iran War, as unemployment fell to the lowest level since the creation of the euro in 1999, inflation returned to the ECB’s 2% target, and real wages grew moderately. But in the two months after the initiation of the Iran War, consumer confidence fell by the fourth-largest amount since the inception of the survey (Exhibit 11). Until the Iran War ends, I expect Eurozone consumer confidence to remain weak given energy supply vulnerabilities and the price shock being felt by European households.
EXHIBIT 11
European Consumer Confidence Fell Sharply since the Iran War Began
As of May 2026
Source: Bloomberg, European Commission
ECB Expectations
Adding insult to injury, the ECB hiked rates by 25 bps on 11 June, and markets suggest at least one additional 25-bps hike by year end (Exhibit 12). Hiking interest rates will not increase the flow of crude oil or liquified natural gas through the Strait of Hormuz, but it will depress economic activity in a region that has seen lethargic activity levels for years.
EXHIBIT 12
Markets Suggest ~32 bps of Additional ECB Rate Hikes through December 2026
As of 22 June 2026
Markets imply a 10% chance of a 25-bps rate hike at the 23 July policy meeting and a 78% chance of one 25-bps rate hike through the 10 September policy meeting.
Source: Bloomberg
Trade Tensions
The July 2025 Turnberry agreement capped US tariffs on European goods at 15%, though steel and aluminum remained subject to a 50% tariff. The European Union subsequently ratified the deal with conditions, but both sides were critical of the other’s compliance with the letter and spirit of the agreement. In early May, President Trump threatened to raise tariffs on European autos to 25%; if imposed, the agreement could unravel—reigniting a trade conflict between two blocs that exchange over $1 trillion in goods annually. I expect trade tensions between the United States and European Union to persist.
Defense Ramp
A bright spot for Eurozone growth is the increase in defense spending (Exhibit 13). While the ramp in German defense spending is most notable, the increase in non-US NATO defense spending has already been impressive with a 37% real increase from 2023 to 2025. Going forward, spending on the military will more than double to over $1 trillion over time if non-US NATO members comply with the commitments they made in 2025 to spend 5% of GDP on defense and related infrastructure. This could lead to significant increases in industrial activity and technology investment, but also larger fiscal deficits.
EXHIBIT 13
Total Defense Spending Is One Metric, but Equipment Spending Is Also Important
As of 3 June 2025
Figures are based on 2021 prices and exchange rates. Figures for 2025 are estimates. For those Allies that have national laws or political agreements that call for 2% of GDP or more to be spent on defense annually, but that did not declare figures for 2025, it has been assumed that they spent 2% of GDP on defense.
* Denmark has declared that it has allocated more than 20% of defense expenditure to major equipment.
Source: Lazard Geopolitical Advisory
Initially, I expect the traditional industrial sector to benefit from the military spending boost. Excess capacity in the auto industry can be repurposed in a matter of months to produce military equipment, such as armored personnel carriers and tanks, while retaining many of the original workers. Longer term, I expect higher military and related infrastructure investment to improve Europe’s competitive position in technology, with defense-tech innovation helping to raise the region’s productivity growth rate. Some benefits of this spending will only be evident years from now, but I expect the payoff will be material.
Japan
Japan’s corporate reform agenda continues to bear fruit, while rising rates could contribute to the strengthening of the yen against the US dollar and other currencies.
Investment Implications
As allocators recalibrate, I anticipate a rotation away from US equities, growing demand for EM debt, and heightened interest in real assets.
Three Core Convictions
A weakening US dollar will cause investors to rethink their US exposure; steeper yield curves will follow widening fiscal deficits; non-US equities will gain traction.
United States
While AI-driven tailwinds continue to lift US equity market performance, underlying economic resiliency seems increasingly dubious.
China
China’s apparent stability masks deeper vulnerabilities that I do not believe can be resolved without meaningful government intervention.
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Published on 24 June 2026.
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