Markets have rebounded strongly after President Donald Trump chose to halt military action against Iran, but improved risk sentiment doesn’t change the bigger picture—oil prices are likely to stay elevated.
A clear relief rally is underway. US equity futures jumped almost immediately following the announcement of a two-week pause, with the Dow, S&P 500, and Nasdaq-100 all moving sharply higher. Meanwhile, oil prices, which had surged on fears of supply disruptions in the Strait of Hormuz, retreated as traders quickly unwound worst-case positions.
The speed of the reaction highlights how markets had been positioned for escalation. Defensive strategies were widespread, volatility was high, and crude prices had already priced in a significant geopolitical premium. Removing even part of that risk triggered a rapid reversal.
This strong rally also reflects how stretched investor sentiment had become. Markets were preparing for a scenario where a substantial share of global oil supply could be disrupted. Even a temporary easing of those fears prompted a swift shift back into equities.
Equity markets had already hinted at a possible de-escalation. Despite increasingly aggressive rhetoric, indices had begun to stabilize, suggesting investors anticipated some form of pause. The confirmation has now accelerated the move back into risk assets.
Technology stocks are expected to lead the recovery. The sector had been hit hardest by rising yields and risk aversion, but slightly lower oil prices help ease inflation concerns, supporting valuations—especially for large-cap and AI-driven companies.
Consumer sectors should also benefit quickly. Lower oil prices reduce fuel costs, boosting household purchasing power. Airlines, travel firms, and retailers are particularly well positioned to gain from improved sentiment and lower input expenses.
Financial stocks are also likely to rise. Greater stability encourages deal-making, strengthens capital markets activity, and eases pressure on credit conditions. Banks typically perform better when uncertainty declines and risk appetite increases.
Energy stocks, however, face a more mixed outlook. In the short term, falling crude prices may weigh on them. But underlying supply constraints remain unresolved, inventories are still tight, and geopolitical fragmentation continues to influence energy flows.
There’s a reason oil prices remain significantly higher this year. The risks go beyond the current conflict. Even if shipping through Hormuz resumes, it only provides temporary relief and does not fix deeper vulnerabilities in global energy supply chains.
As a result, oil is unlikely to fall back to previous lows anytime soon. A geopolitical premium is now built into prices, and traders will continue to factor in the risk of renewed disruptions.
Attention now turns to whether the two-week pause will hold. Temporary ceasefires often come with uncertainty, effectively starting a countdown. Markets will be watching closely to see if diplomacy can turn this into a longer-term solution.
Key factors include compliance with the pause, coordination over shipping routes, and the tone of ongoing negotiations. Meaningful progress could extend the rally further, lifting industrials, cyclical sectors, and emerging markets.
However, if diplomacy fails, sentiment could reverse quickly. Oil prices would likely surge again, volatility would return, and recent equity gains could be erased.
For now, investors are navigating a narrow path between opportunity and risk. The current rally is driven by reduced immediate fear, but underlying tensions remain unresolved—and energy markets continue to reflect that uncertainty.
Positioning for short-term gains may be reasonable, but any sustained upside will depend entirely on whether diplomatic efforts lead to lasting progress.
Sources: Nigel Green
THE ETERNAL SOVEREIGN 
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