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Companies are being forced to rethink how they invest, operate and manage risk as the Iran war reshapes the global economic outlook.
What began as a geopolitical shock is now feeding directly into boardroom decisions, pushing executives to delay spending, preserve cash and reassess their tolerance for risk.
The conflict is driving a repricing of uncertainty. Rising capital costs, weaker expectations for future cash flows and increased volatility are forcing company leaders to change course. Hurdle rates – the return a company or investor requires from a project to justify the risk – are rising as confidence in those forecasts weakens, which is already shaping how business leaders allocate capital over the next few quarters.
In response, chief financial officers are delaying investment, preserving liquidity and stress-testing how their business holds up under higher energy prices and interest rates. Risk appetite is falling, and the Iran war is accelerating that shift. The conflict is not an isolated shock; it adds to an already high level of global uncertainty, feeding directly into decisions on where and how companies invest.
Financing uncertainty
The same factors are now playing out in financial markets. Equities have been volatile, with sharp sell-offs followed by rapid reversals as investors respond to shifting signals on the conflict’s course. The US dollar has steadied after recent weak performance in 2025, reflecting the classic flight to safety when uncertainty jumps.
Bond markets, however, are sending mixed signals. Expectations of higher inflation are pushing markets to price-in rising interest rates in Europe, while in the US, political pressure on the Federal Reserve is adding to uncertainty over the path of interest rates. For companies, that means less clarity on future borrowing costs.
This matters because of how those market moves feed through into financing conditions. Central banks control short-term rates, but longer-term borrowing costs are largely set by markets, through yields on government bonds, which act as a benchmark for borrowing costs across the economy.
As inflation expectations rise, those yields tend to increase, which has already been reflected in recent market moves, thereby pushing up companies’ costs of debt, and the overall cost of capital.
Stagflation risks
That comes as the outlook for the economy darkens, with concerns growing that stagflation has returned, which happens when inflation spirals but growth slows. Markets have already begun to price stagflation into asset prices, and it is beginning to weigh on both consumer demand and confidence levels.
At the same time, the global energy shock driven by the war in Iran is raising operating costs for companies, with those in transport, logistics and aviation particularly exposed. High energy prices are likely to feed consumer price inflation, too.
Crucially, this energy shock is unlikely to be short-lived. Even if the Middle East conflict de-escalates – as diplomatic efforts continue – damage to energy infrastructure could keep prices elevated for months, prolonging the pressure on both businesses and consumers.
For company leaders, this has immediate implications as the priority shifts towards strengthening cash reserves, as uncertainty over both costs and demand increases.
In practice, that means tightening working capital, for example by reducing inventory and speeding up collections, as well as stress-testing exposure to higher energy prices, and delaying non-essential spending where possible. In periods of conflict and high uncertainty, cash is king.
Companies are also setting a much higher bar for their investments, with only those that they expect to generate a good return under a wide range of scenarios given permission to proceed. The rest are being delayed or outright cancelled. This is the hurdle rate; the minimum return, and higher expected interest rates are raising it sharply higher.
When those investments do get the green light, it is often going to areas that can strengthen the company’s resilience, especially in global supply chains which the Iran war have made more fragile. Cash is also flowing to projects that can help manage the cost and availability of energy, as prices soar.
Another approach I see firms taking is trying to lock in financing now, at current borrowing rates, before financing conditions tighten further as expected. This echoes what companies did during the Covid pandemic, issuing debt at relatively low rates to build liquidity.
Scenario planning replaces forecasts
The problem that boards often make is using traditional forecasting methods. In periods of conflict, models built on historical data offer limited guidance.
For that reason, executives are now relying more on scenario analysis, which means testing a whole slate of outcomes rather than projecting a single expected path forward.
One example of that is how airlines such as Air France-KLM are drawing up contingency plans because the Iran war threatens fuel supplies, including cutting some routes to Asia where refuelling for return flights may become uncertain.
Scenario-based planning requires abandoning the comfort of a single forecast. Looking ahead, the course of the Middle East conflict is the key variable in any assumptions. If the war de-escalates then the damage to energy infrastructure could keep energy prices elevated for months. But if it escalates, then supply disruptions could keep pressure on costs for even longer.
The challenge for business leaders will now be committing capital across a range of uncertain outcomes.
Karl Schmedders is professor of finance at IMD
