Three months ago, on February 28, 2026, the United States and Iran—alongside Israel—entered into a military conflict that would fundamentally reshape the macroeconomic landscape for the remainder of the year. The fighting lasted approximately 40 days, with a ceasefire taking effect on April 8, 2026. While hostilities have since ceased, the economic aftershocks continue to reverberate through global markets in ways that few anticipated at the start of the year.
The most immediate and visible impact has been on oil. From the conflict's onset through its peak, crude oil prices surged from approximately $64-65 per barrel to $120—a near-doubling that sent shockwaves through inflation metrics worldwide. As of May 25, 2026, oil has retreated to roughly $92 per barrel, but the damage to inflation expectations has already been done. Core CPI, headline CPI, and PPI all showed substantial increases in the months following the oil spike, forcing central banks—and particularly the Federal Reserve—to reassess their monetary policy stance.
At the beginning of 2026, the consensus expectation was that the Fed would deliver approximately two rate cuts over the course of the year. This dovish outlook was predicated on moderating inflation, a cooling labor market, and economic data that suggested the Fed had successfully engineered a soft landing. Those expectations now seem quaint. As inflation data came in hotter than anticipated through March and April, the market's perception of Fed policy shifted dramatically. We are no longer pricing in rate cuts. We are pricing in rate hikes.
This shift has been abrupt and severe. The 10-year Treasury yield, the primary barometer of bond market sentiment and a critical input for corporate borrowing costs, has climbed from approximately 4.0% at the start of the conflict to 4.5% today. For context, the last time yields were at these levels was during the post-Liberation Day tariff tantrum earlier this year. But there is a critical difference: during the tariff episode, President Trump announced a tariff pause, which allowed the 10-year yield to reverse course. This time, there is no policy lever that can be pulled to immediately alleviate the pressure. The Strait of Hormuz remains closed, oil remains elevated, and inflation remains sticky.
It is worth emphasizing that the 10-year yield is not simply a passive reflection of Fed policy—it is an active signal to the Fed about what the bond market believes needs to happen. When the 10-year breaks out and heads higher, it is the bond market's way of telling the Federal Reserve that inflation expectations are becoming unanchored and that tighter policy is required. Companies and banks do not base their lending decisions solely on the federal funds rate; they base them on the 10-year Treasury yield. As that yield rises, borrowing costs increase across the economy, tightening financial conditions even if the Fed has not yet acted.
The equity market's response to these shifting macro conditions has been bifurcated in a way that reveals which sectors remain resilient in a rising-rate environment and which do not. The S&P 500, after initially selling off from a peak of approximately 6,950 at the end of February to a low of 6,300 during the height of the conflict, has since recovered to roughly 7,470—a gain of more than 18% from the post-ceasefire trough. This recovery has been driven almost entirely by semiconductor stocks, artificial intelligence infrastructure plays, and mega-cap technology names that are perceived to be immune to the vagaries of the rate cycle.
Financials, by contrast, have been left for dead. The Financial Select Sector SPDR ETF (XLF) peaked in January 2026 at approximately $56 per share. It subsequently fell to $47 during the conflict and has only recovered to around $51-52 today—a gain of just 8-8.5% from the lows. While the S&P 500 has not only recovered but exceeded its pre-conflict highs, the financial sector remains more than 7% below its January peak. This divergence is not subtle. It is a clear signal that the market does not believe financials can outperform in an environment where rate hikes are on the table.
The reason for this underperformance is straightforward: rising rates compress net interest margins in the near term, increase credit risk, and create uncertainty around loan demand. When the market is pricing in rate hikes rather than rate cuts, financial stocks get hit first and hardest. Payment stocks, fintechs, and consumer-facing credit platforms—categories that thrive in a falling-rate environment—have been similarly decimated. These are the names that benefit most when the Fed is easing, when consumer borrowing becomes cheaper, and when corporate lending activity accelerates. In the current environment, none of those dynamics are in play.
The CME FedWatch Tool, which aggregates fed funds futures to derive probabilities for future Fed policy moves, tells the story in stark terms. One month ago, on April 24, 2026—shortly after the ceasefire took hold—the probability of a 25-basis-point rate cut by the September 16 Fed meeting stood at 25%. The probability of a rate hike was 0%. Today, those probabilities have completely reversed: the chance of a rate cut is now 0%, while the chance of a rate hike has climbed to 28.9%.
The October 28 Fed meeting paints an even more aggressive picture. A month ago, there was a 27% probability of a 25-basis-point rate cut. Today, that probability is 0%. The probability of a rate hike, which was also 0% a month ago, now stands at 38.4%.
By the December 9 Fed meeting—the final policy meeting of 2026—the shift is even more pronounced. One month ago, the probability of a 25-basis-point rate cut was 31%. Today, it is 0%. The probability of a rate hike has surged from 0% to 54.3%. Perhaps most striking, the probability of a 50-basis-point rate hike—which was functionally zero a month ago—now sits at 13%. Meanwhile, the probability that the Fed holds rates steady has fallen from 61% to just 45.7%.
The message from the derivatives market is unambiguous: by December, the base case is now a rate hike, not a hold. This is an extraordinary shift in sentiment in the span of just 30 days, and it has been entirely driven by inflation fears stemming from elevated oil prices.
The Strait of Hormuz has been called the world's most important oil chokepoint, and for good reason. Under normal circumstances, approximately 120 ships pass through the Strait each day, carrying roughly one-fifth of global oil supply. During the height of the conflict, that number fell to single digits. Today, traffic has recovered somewhat—recent estimates suggest that 20 to 30 tankers are passing through daily—but we are still operating at less than a quarter of normal capacity.
This bottleneck has had cascading effects. Strategic petroleum reserves around the world, including the United States Strategic Petroleum Reserve, have been drawn down at an accelerated pace to compensate for the supply disruption. These reserves are finite, and while they have provided a temporary buffer, they cannot be relied upon indefinitely. If the Strait remains closed or operates at drastically reduced capacity for an extended period, the drawdowns will eventually reach levels that force governments to curtail releases, which would send oil prices surging once again.
The prevailing narrative in financial markets today is that the Strait will remain effectively closed for the foreseeable future, that a durable agreement between the United States and Iran is unlikely, and that oil will therefore remain elevated—keeping inflation sticky and forcing the Fed into a hiking cycle. This narrative is not without merit. Geopolitical negotiations are notoriously unpredictable, and there is no guarantee that a deal will materialize in the coming weeks or months.
But markets are not built on certainties—they are built on probabilities. And the current pricing of Fed policy, equity valuations, and sector rotation suggests that the market has moved entirely to one side of the boat. The consensus view is now that the Strait stays closed, inflation stays high, and the Fed hikes rates. What is not priced in is the opposite scenario: that the Strait reopens, oil collapses, inflation moderates, and the Fed pivots back toward easing.
This is where the opportunity lies.
Let us game out what happens if—within the next few days, weeks, or months—the United States and Iran reach a memorandum of understanding that results in the full reopening of the Strait of Hormuz. The effects would be immediate and cascading.
First, oil prices would fall sharply. With normal traffic resuming and 120 ships per day once again transporting crude through the Strait, the supply shock that has kept oil elevated would reverse. Prices would likely fall back toward the $60-70 range within weeks. This is not speculation—this is what happened during previous supply disruptions when transportation routes were restored.
Second, inflation would moderate rapidly. It is critical to understand that a significant portion of the recent inflation spike has been driven by energy costs and energy-adjacent categories. Oil is not just a commodity—it is a feedstock for plastics, cosmetics, packaging materials, transportation fuels, and countless other products. When oil prices fall, the cost of producing and transporting goods falls in tandem. This would show up in CPI, PPI, and other inflation metrics within one to two months.
Third, the Federal Reserve's entire calculus would shift. If inflation begins to moderate in June and July, the urgency behind rate hikes dissipates. The 10-year Treasury yield, which has been climbing on inflation fears, would likely reverse course and trend lower. Corporate borrowing costs would ease. Consumer credit would become cheaper. The financial conditions that have been tightening over the past two months would begin to loosen.
Fourth, Fed expectations would flip once again. The same CME FedWatch probabilities that currently show a 54% chance of a December rate hike would begin to price in the opposite scenario: no hikes, and potentially even a return to rate cuts by year-end. The pendulum would swing back.
This is not a far-fetched scenario. It is, in fact, the most likely outcome if geopolitical tensions continue to de-escalate and if both the United States and Iran recognize that keeping the Strait closed serves neither party's long-term interests. Financial markets, however, are extraordinarily bad at pricing in regime changes before they happen. Markets extrapolate the present into the future until the present changes—and then they reprice violently.
The question investors must ask themselves is not whether the Strait will reopen—it is whether they are positioned for that outcome when it does.
If the thesis outlined above plays out, the sectors and stocks that have been most punished by rising rate expectations will become the primary beneficiaries of a pivot back toward easing. Financials, cyclicals, payment platforms, and fintech names—all of which have underperformed dramatically over the past two months—would become the market's new leadership. This is not a speculative call. It is a recognition that these names are deeply unloved, trading well below their January and February highs, and priced for a world in which the Fed hikes rates aggressively for the remainder of the year.
Consider SoFi Technologies (SOFI) as a case study. SoFi reported first-quarter earnings that were exceptional by any objective measure. Adjusted revenue growth came in at 41%, well above the company's prior guidance of mid-30s growth rates. The business is accelerating, not decelerating. Member growth remains strong, credit performance has been resilient, and the company's vertically integrated technology stack—anchored by its Galileo and Technisys platforms—continues to differentiate it from legacy competitors.
And yet, the stock has collapsed. SoFi traded as high as $32 earlier this year. Today, it sits at approximately $15—a decline of more than 50%. Over the past few months alone, the stock has fallen from the low $20s to its current level. This is not a reflection of deteriorating fundamentals. It is a reflection of macro fear.
During the company's earnings call, CEO Anthony Noto was explicit about why SoFi did not raise its full-year guidance despite beating estimates handily. He stated that the company had entered 2026 expecting two rate cuts. That expectation has now shifted to the possibility of rate hikes or, at best, no rate cuts at all. In that environment, management chose to be conservative with its outlook rather than risk disappointing investors later in the year.
But consider what happens if the Strait reopens, oil falls, inflation moderates, and the Fed's posture shifts back toward easing. SoFi would almost certainly raise its guidance during the second-quarter earnings call. The company's net interest margin would improve as funding costs stabilize or decline. Loan origination volumes would accelerate as consumer confidence returns. The stock, currently down more than 50% from its highs, would re-rate aggressively higher.
This is what asymmetry looks like. The downside from current levels is limited—management has already de-risked guidance, the stock has been beaten down to levels last seen in early 2023, and the business continues to execute. The upside, however, is substantial. If the macro backdrop shifts in SoFi's favor, the stock could easily reclaim $25-30 within months. That is a 60-100% return on a name that the market has left for dead.
Disclosure: Double Eleven Capital holds a position in SoFi Technologies as of May 25, 2026.
SoFi is not unique in this regard. Across the financial and fintech landscape, there are dozens of names trading at multi-year lows despite posting strong earnings, maintaining solid credit quality, and guiding conservatively in the face of macro uncertainty. Affirm, Toast, Block, PayPal—these are not distressed businesses. They are high-quality companies being priced as if the Fed is going to hike rates indefinitely and as if consumer spending is about to fall off a cliff. Neither of those things is likely to happen.
What is likely to happen is that the market will realize, at some point in the coming weeks or months, that it has overreacted to the inflation scare and underpriced the probability of a benign resolution to the Strait of Hormuz situation. When that realization dawns, the rotation out of semiconductors and AI infrastructure and into cyclicals, financials, and rate-sensitive growth stocks will be swift and violent. The investors who are positioned for that rotation today will capture the bulk of the upside. Those who wait for confirmation will be buying at much higher prices.
It is worth noting that this is not a call to abandon large-cap technology or semiconductor exposure. Those sectors have structural tailwinds that will persist regardless of the rate environment. But it is a call to recognize that the market has become dangerously one-sided in its positioning, and that the most compelling opportunities today are in the sectors that everyone has abandoned.
The S&P 500 closed the week at 7,470. If the thesis outlined in this memo plays out—if the Strait reopens, inflation moderates, and the Fed pivots back toward easing—we would not be surprised to see the index break above 8,000 by year-end. That move will not be driven by the stocks that have already doubled this year. It will be driven by the names that have been left behind, the sectors that have been written off, and the trade that no one wants to make.
That is where we are positioned. That is where we believe the next leg of this bull market will come from. And that is why we remain constructive on financials, cyclicals, and rate-sensitive growth names heading into the second half of 2026.
