The Iran escalation has raised fresh concerns about how small-cap U.S. equities might react, with Bank of America warning of an oil-driven stagflation risk. Analyst Jill Carey Hall noted that BofA's macro team expects only a limited impact on oil prices of $10-15 per barrel if the conflict remains contained.

However, Bank of America cautioned that a prolonged shutdown at the Strait of Hormuz could push Brent crude $40-80 higher. The bank's research shows the Russell 2000 has historically sold off more sharply than large caps during risk-off periods, typically falling 8-11% and underperforming by 1-2 percentage points. Yet the index has also rebounded quickly, recovering more than 11-12% within three months.

Bank of America highlighted that small caps currently have greater exposure to industries that benefit from higher oil prices and less exposure to those hurt by them. In past stagflation episodes, small-cap value stocks saw particularly strong returns. However, the bank flagged the sector's heightened sensitivity to Federal Reserve policy as a major caveat, noting that small caps are highly leveraged with elevated refinancing risk.