President Trump’s announcement of an Iran deal including a full reopening of the Strait of Hormuz was met with excitement from investors.
Part of that was general risk-on sentiment. The conflict in the Middle East has snarled global supply chains for months.
Traders are ready for things to go back to normal.
But the rally was also driven by the softening of a major market headwind: the prospect of rate hikes in 2026. FedWatch data is currently showing a 55% implied probability of higher rates this year, down from 70% immediately following the red-hot May jobs report.
“The market’s first read is lower oil, lower inflation, and renewed risk appetite,” said Mark Malek, CIO at Siebert Financial. “The peace framework is genuinely positive, especially if it helps reopen the Strait of Hormuz and ease energy pressure.”
A sharp decline in oil prices has also fed into decreased odds of a 2026 rate hike. Brent crude, which tested the $120-per-barrel level at one point during the Iran war, fell to around $83 on Monday.
Considering that energy costs have been one of the biggest inputs for rising US inflation, a moderation in oil prices could lessen that pressure and reduce the need of the Fed to raise rates. This, in turn, is positive for stocks, since higher rates are generally a negative for asset prices.
“Lower energy prices ease pressure on the committee to lean hawkish,” stated Kevin Ford, a macro strategist at Convera.