Middle East Conflict Reverses 2026 Consensus Trades

The conflict in the Middle East has sent shockwaves through the financial markets, leading investors to reassess some of the most sought-after trades and investment strategies for 2026. As global equities decline, the dollar gains strength, and expectations for Federal Reserve interest rate cuts are tempered. This situation prompts a reevaluation of risk and opportunities in the current market landscape.

“This year, investors have positioned themselves for growth. A stagflationary shock wasn’t part of the plan,” noted Chris Turner, global markets head at ING.

According to the Week in Breakingviews newsletter, a publication from Reuters’ global financial commentary team, “Investors are exercising caution and may still have more adjustments to make.”

Here are five key themes that have been disrupted by the ongoing conflict in the Middle East:

1. DOLLAR SHORTS SQUEEZED

Just last month, investors were holding their most significant bearish position on the dollar since 2021, based on data from the U.S. markets regulator. Anticipated rate cuts from the Federal Reserve provided little motivation for substantial investments in the U.S. currency. However, following the outbreak of conflict, the dollar has surged to its highest level since last November, signaling a flight to safety.

“The U.S. dollar is the primary beneficiary of the Middle East conflict,” stated Ipek Ozkardeskaya, a senior analyst at Swissquote. “The U.S. economy will likely show resilience against energy shocks.” At present, the U.S. is a net energy exporter, importing just 17% of its needs—its lowest amount in 40 years, according to Jean-François Robin, head of global research at Natixis CIB.

2. REST OF WORLD EQUITIES SLUMP

Global equities, which started 2026 backed by a strong “buy equities” consensus, have suddenly taken a downward turn. The MSCI World ex-US index has fallen sharply after the U.S. and Israeli strikes on Iran, while the S&P 500 has shown more resilience, as investors have favored the U.S. market due to its reduced reliance on energy imports.

“The conflict hasn’t completely undermined the long-equities thesis for 2026, but it has increased dependence on rates and oil,” explained Lale Akoner, a global market strategist at eToro, adding, “If energy prices keep inflation elevated, it will be multiples, not earnings, that are the weak link.” Earlier signs of broader market leadership beyond the U.S. have diminished as investors gravitate back toward the depth and liquidity of U.S. markets.

Ozkardeskaya suggested the shock could redirect investments toward energy-rich markets, negatively impacting energy-dependent economies and potentially halting the ongoing shift from the U.S. to Europe and Asia.

3. EMERGING MARKETS RATTLED

Emerging markets, which had shown strong performance earlier this year with over a 15% increase in EM stocks and a 1.9% rise in MSCI’s emerging market currencies index, experienced setbacks last week, losing 7% and 1.5%, respectively. The once strong performers, like South Korea’s Kospi, faced sharp declines.

“The biggest underperformers last week were those that had excelled between January and February,” stated Goldman Sachs in a note to clients.

The firm observed that the most pronounced de-risking was evident in markets most affected by the conflict and oil price fluctuations, including Egypt, the United Arab Emirates, and Thailand, along with last year’s outperformers like Korea, Brazil, and South Africa. Analysts at JPMorgan have downgraded EMEA emerging market currencies to ‘market weight’ and added Poland’s zloty to their list of ‘underweight’ currencies, given the heightened energy price exposure in central and eastern Europe.

4. FED RATE CUTS IN DOUBT

Soaring energy prices have raised inflation concerns, causing traders to adjust their expectations for interest rate cuts by the Federal Reserve. Before the onset of the conflict, the markets anticipated about a 50% chance of a rate cut at the June meeting, but that probability has now plummeted to approximately 25%.

This recent energy shock has similarly led to revised expectations for interest rate cuts by the Bank of England, with traders now forecasting the European Central Bank to raise rates instead of cutting them this year.

“Some of the most significant shifts in G10 central bank projections for 2026 have happened in economies that were originally expected to ease further this year,” said Goldman Sachs.

5. BANKS

Banking stocks, which had shown modest gains earlier in 2026, have faced declines as investors reassess the potential economic fallout from disruptions in the Strait of Hormuz.

The risk of rising energy costs has led to concerns about renewed inflationary pressures, which might slow lending and weaken credit demand, even if interest rates remain elevated. While higher interest rates normally support bank margins, increased inflation fears can inhibit borrowing and investment.

“The key risk to monitor is credit spreads and private-market liquidity; geopolitical developments will matter primarily if they lead to tighter financial conditions,” noted eToro’s Akoner.

Reporting was provided by Paolo Laudani, Canan Sevgili, Vera Dvorakova, Gianluca Lo Nostro, and Alessandro Parodi, compiled by Samuel Indyk, with editing by Amanda Cooper and Toby Chopra.