Markets that entered 2026 aligned around a growth-friendly narrative now face a swift reversal as the conflict in the Middle East forces traders to reassess positions they had built earlier in the year. The initial reaction was visible across currencies, equities and interest-rate expectations as investors reprobed the implications of a higher-for-longer energy price environment.
Big-picture reaction
Global equities slid and the U.S. dollar rallied after the outbreak of strikes in the region. Traders who had been positioned for economic expansion are now unwinding some of those exposures amid heightened geopolitical risk and a renewed focus on energy-driven inflation. "This year, investors have been positioning for growth. A stagflationary shock was not part of the plan," said Chris Turner, head of global markets at ING, noting that investors were taking a more cautious stance and still had further positions to unwind.
1) Dollar shorts hit by safe-haven flows
Prior to the conflict, the single largest bearish position on the U.S. dollar since 2021 was in place, according to weekly data from the U.S. markets regulator. That stance reflected expectations for rate cuts by the Federal Reserve and removed much incentive to increase dollar exposure. The conflict reversed that setup: the dollar strengthened to its most potent level since last November as investors sought safety.
Analysts have pointed to the U.S. economy's relative insulation from energy shocks as a driver of the move. "The U.S. dollar emerges as the biggest winner of the Middle East conflict," said Ipek Ozkardeskaya, senior analyst at Swissquote. Jean-François Robin, head of global research at Natixis CIB, underscored that the United States is a net energy exporter, importing just 17% of its needs, a 40-year low, which supports the view that its economy is less vulnerable to spikes in energy costs.
2) Non-U.S. equities fall back
Global shares started 2026 with a broad consensus in favour of buying equities, but that backdrop has been eroded. The MSCI World ex-US index declined sharply after U.S. and Israeli strikes on Iran, while the S&P 500 showed more resilience as investors favored U.S. listings on the basis that the American economy is less dependent on energy imports.
Market strategists say the conflict has not destroyed the long-equities thesis for 2026 but has made its success more dependent on the course of interest rates and oil prices. "The conflict hasn’t destroyed the 2026 long-equities thesis, but it has made it far more rate- and oil-dependent," said Lale Akoner, global market strategist at eToro. She added that if energy keeps inflation sticky, "multiples, not earnings, are the weak link," suggesting valuation compression could be the primary channel for equity weakness if inflation proves persistent.
A shift in investor preference back to U.S. markets has also dulled earlier signs of leadership broadening to Europe and Asia. Swissquote’s Ozkardeskaya said flows may move toward energy-rich markets and that economies dependent on energy imports could suffer, potentially interrupting the rotation away from the United States toward other regions.
3) Emerging markets lose momentum
Emerging market stocks and currencies had been among the best performers in early 2026. EM equities jumped more than 15% year-to-date, and MSCI’s index of emerging market currencies rose 1.9% until the Friday before the conflict. The market reversal was abrupt: the two indexes fell 7% and 1.5% respectively in the subsequent week, with notable declines in previously strong performers such as South Korea’s Kospi.
Goldman Sachs observed that the biggest underperformers in that week had been the strongest performers between January and February, attributing the change to de-risking in markets most exposed to Middle East and oil shocks. The firm highlighted Egypt, the United Arab Emirates and Thailand as especially vulnerable, alongside last year’s winners like Korea, Brazil and South Africa.
JPMorgan also adjusted its positioning, moving EMEA emerging market FX to "marketweight" and adding Poland’s zloty to its list of "underweight" currencies, citing particular exposure in central and eastern Europe to higher energy prices.
4) Fed rate-cut bets trimmed
Higher energy prices have heightened inflation concerns and prompted traders to pare back expectations for interest-rate reductions from the Federal Reserve. Before the conflict, markets had priced roughly a 50% chance of a Fed rate cut at the June meeting, which would mark the first cut under its new chairman. That probability has been reduced to about 25% as the market re-evaluates the path for inflation and policy.
The energy-driven shock has also altered expectations for other central banks: the market has dialed back bets for easing by the Bank of England, and traders are pricing for the European Central Bank to raise rates rather than cut them this year. "Some of the largest shifts in 2026 G10 central bank pricing have come in economies which were priced for further easing this year," Goldman Sachs said.
5) Banking stocks retreat on growth concerns
Bank shares, which had seen modest gains earlier in 2026, dropped as investors reassessed the economic implications of potential disruption in the Strait of Hormuz and the prospect of higher energy costs. While higher interest rates can widen bank margins, renewed inflationary pressure may suppress borrowing and investment, tempering loan growth and demand for credit even if rates remain elevated.
"The key risk to watch is credit spreads and private-market liquidity; geopolitical headlines matter mainly if they translate into tighter financial conditions," said eToro’s Akoner, highlighting that the transmission to banking performance depends on whether the geopolitical shock tightens overall financial conditions.
Conclusion
The Middle East conflict has forced a rapid reassessment of several consensus trades for 2026. The immediate market response has favored the U.S. dollar and U.S. equities while penalizing non-U.S. stocks, emerging market assets and bank shares. At the same time, the probability of near-term Fed easing has declined as markets factor in the prospect of stickier inflation driven by energy-price developments.