How Geopolitical Conflict Affects Valuation Assumptions
Author: Redwood Valuation Content Team
Published: May 11, 2026
Valuation models are structured representations of future expectations. They translate assumptions about growth, risk, and capital availability into valuation conclusions. Geopolitical conflict, however, can significantly alter those underlying assumptions. While it doesn’t change valuation methodology itself (discounted cash flow, market comparables, and option-based frameworks remain intact), the change occurs in the assumptions that feed those models. When the underlying environment shifts, the model outputs shift with it.
The recent conflict in Iran provides a clear example of how geopolitical risk can impact valuation assumptions. Disruptions to energy markets, trade routes, and capital flows impact discount rates, growth projections, margins, and scenario probabilities.
From Conflict to Model Inputs
The impact of geopolitical conflict on valuation assumptions follows a consistent sequence:
Energy shock → Inflationary pressure → Changes in market risk perception → Valuation assumptions
The Strait of Hormuz sits at the center of this dynamic. Prior to the conflict, roughly 21 million barrels of oil per day moved through the corridor, making it one of the most critical energy chokepoints globally.
When disruption risk rises, it causes:
Oil prices to increase
Input costs to rise across industries
Inflation expectations to adjust upward
The IMF has consistently noted that energy-driven inflation feeds into broader economic conditions, influencing both monetary policy and capital costs. [1] Those macro effects flow directly into valuation assumptions.
Where the Impact Enters the Valuation Model
1. Discount Rates: Risk Premia Expand
Discount rates reflect the return required by market participants. Geopolitical instability increases uncertainty around future cash flows, which raises required returns. This shows up through:
Higher equity risk premiums
Wider credit spreads
Elevated volatility assumptions
Even small changes matter. A 100–200 basis point increase in the discount rate can reduce enterprise value by double-digit percentages for long-duration assets.
The mechanism is direct: higher perceived risk increases required return, which lowers present value.
2. Growth Assumptions: Forward Curves Flatten
Growth projections embed expectations about demand, capital availability, and execution timelines.
Geopolitical conflict introduces friction across key assumptions, including:
Slower global growth due to inflation and trade disruptions
Reduced capital availability for expansion
Longer sales and fundraising cycles
In 2023, the IMF estimated that geoeconomic fragmentation could reduce global GDP by up to 7% over the long term. [2] While that estimate was not specific to the current conflict in Iran, it provides useful context on how sustained geopolitical fragmentation can affect the macro assumptions that inform valuation conclusions.
In valuation models, these pressures may translate into lower revenue growth rates, delayed scaling assumptions, and more conservative terminal values. Growth can become more volatile, uneven across regions, and unpredictable in timing.
3. Margins: Cost Structures Reprice
Energy and supply-chain shocks feed directly into operating assumptions. Rising input costs affect the cost of goods sold, increase logistics and transportation expenses, and push labor costs higher through inflation pass-through. These pressures flow through the income statement and compress forward-looking margins.
For valuation models, this appears as:
Lower EBITDA projections
Reduced operating leverage
Higher reinvestment requirements
Margin assumptions tend to adjust after macro shifts begin. When they do, valuation impacts follow quickly.
4. Capital Availability: Timing and Structure Shift
Valuation models implicitly assume access to capital. This core premise falters under geopolitical instability, which disrupts both funding availability and borrowing costs. Recent data shows that Middle East and North Africa (MENA) startup funding fell to $941 million in Q1 2026, reflecting a pullback in capital deployment amid rising regional risk. [3]
This dynamic extends beyond the region, shaping how capital is deployed across markets. Investors are approaching new opportunities with greater selectivity, prioritizing stronger fundamentals and clearer paths to return. At the same time, required returns are increasing to compensate for elevated risk, raising the cost of capital. Financing timelines are also extending, as transactions take longer to diligence, negotiate, and close in a more uncertain environment.
In valuation models, this translates into:
Longer paths to liquidity
Greater dilution in forward scenarios
Increased weighting of downside outcomes
Capital constraints reshape both expected outcomes and their probability.
5. Scenario Weighting: Distribution of Outcomes Widens
Uncertainty affects not only assumptions but also the range of possible outcomes.
Scenario-based valuation frameworks, including PWERM, become more sensitive in this environment because:
Downside scenarios become more plausible
Exit timing becomes less predictable
Outcome dispersion increases
As outlined in Redwood’s guidance, these methods rely on probability-weighted outcomes and defensible assumptions around timing and value. Geopolitical instability reshapes both the likelihood of each scenario and its embedded value.
Interdependence of Assumptions
Valuation inputs do not move in isolation. Changes in macro conditions tend to cascade across multiple assumptions at once. Higher inflation typically feeds into higher discount rates as required returns adjust upward. Slower growth expectations often extend exit timelines, increasing the duration over which cash flows are exposed to risk. Margin compression reduces projected cash flow, which can, in turn, heighten reliance on external capital. When capital becomes more constrained, downside scenarios carry greater weight in the overall valuation.
Because these relationships are interconnected, valuation models require internal consistency. Updating one assumption without adjusting the others can produce conclusions that do not align with how market participants evaluate risk and return in practice.
Fair Value in a Shifting Market
Under ASC 820, fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In forming that price, market participants incorporate prevailing conditions into their expectations of risk and return. In the current environment, those expectations are shaped by elevated geopolitical risk, persistent inflationary pressure, more selective capital deployment, and increased uncertainty around timing and outcomes.
As a result, valuation conclusions increasingly reflect:
Wider ranges of potential value outcomes
Greater reliance on scenario-based analysis
Increased emphasis on observable data
More detailed support for assumptions
These are structural adjustments to uncertainty, not temporary deviations.
Conclusion: Assumptions Carry the Signal
Geopolitical conflict does not introduce new valuation frameworks. It changes the environment that those frameworks are modeling.
Energy shocks may feed inflation, which in turn shapes interest rates. Interest rates can influence discount rates and capital availability, thereby impacting investor behavior.
The result is a consistent pattern:
Discount rates increase
Growth expectations moderate
Margins compress
Exit timelines extend
Outcome dispersion widens
While the methodology typically remains the same, the assumptions evolve to reflect a different set of expectations.
Frequently Asked Questions
How does geopolitical conflict affect valuation models?
It affects the inputs. Discount rates, growth assumptions, margins, and scenario probabilities are adjusted to reflect higher uncertainty, inflation pressure, and changes in capital availability.
Which valuation assumptions are most sensitive to geopolitical risk?
Discount rates and scenario weighting tend to move first. Growth and margin assumptions typically adjust as macro effects filter into company-level performance.
Why do valuation ranges widen during periods of conflict?
Uncertainty increases the range of plausible outcomes. Scenario-based approaches assign greater weight to downside cases, and differences in assumptions lead to wider spreads in valuation conclusions.
Does this impact only companies with direct exposure to the Middle East?
No. The primary transmission channels, such as energy prices, inflation, and capital markets, affect most industries, even without direct regional exposure.
How does this relate to ASC 820 fair value requirements?
ASC 820 requires valuations to reflect the perspective of current market participants. When market participants adjust for geopolitical risk, those adjustments must be reflected in valuation assumptions.
[1] Hao Jiang, Fernanda Nechio, Andrea Pescatori, and Felipe Vázquez, “The Energy Origins of the Global Inflation Surge,” IMF Working Papers 2025, no. 091, International Monetary Fund, May 9, 2025, https://www.elibrary.imf.org/view/journals/001/2025/091/article-A001-en.xml.
[2] Andrea Shalal, “IMF Says Fragmentation Could Cost Global Economy Up to 7% of GDP,” Reuters, January 15, 2023, https://www.reuters.com/markets/imf-says-fragmentation-could-cost-global-economy-up-7-gdp-2023-01-15/.
[3] Nesma Abdel Azim, “MENA Startup Funding Slips to $941 Million in Q1 2026 amid Heightened Geopolitical Risk,” Wamda, April 13, 2026, https://www.wamda.com/2026/04/mena-startup-funding-slips-941-million-q1-2026-amid-heightened-geopolitical-risk.