A U.S.–Iran agreement to reopen the Strait of Hormuz appears to be moving closer. If implemented, it would restore energy flows and begin to unwind the largest supply disruption in history. Current reports suggest that reopening the Strait would trigger a 60-day negotiation phase focused on Iran’s nuclear program, so the path forward is not yet free of implementation risk.

For markets, though, the key point is simpler: a deal would allow shipping through the Strait to resume and begin a gradual physical normalization in the oil market. That prospect has already started to feed through to asset prices, with lower oil prices, softer bond yields, and firmer equities consistent with a relief trade.

Even so, markets are not pricing a full normalization. Forward contracts still have oil well above pre-conflict levels at the end of the year, suggesting investors expect the adjustment process to be slow rather than immediate. That caution looks justified. Physical rebalancing in the oil market is unlikely to happen quickly, which means oil prices may remain elevated for some time, and energy-related inflation pressures should ease only gradually.

In recent weeks, markets had moved toward pricing further Fed tightening. Probabilities of a hike by end‑2026 rose above 60%, with a move fully priced by early 2027. A deal should temper these expectations, but a return to markets pricing in rate cuts in the near term still appears unlikely, absent labor market weakness.

This reflects two factors:

1. Inflation. Even with some moderation in oil prices, a return to pre‑conflict levels appears unlikely. As a result, headline inflation should remain above target through 2026. Energy relief alone does not provide a sufficient basis for policy easing.

2. Growth. The Fed continues to face an economy that has proven more resilient than expected. Consumer spending remains firm, capex is strong, and the labor market appears broadly stable, with low claims and tentative signs of improving employment growth.

Taken together, resilient growth and still‑elevated inflation weaken the case for rate cuts. We therefore expect the Fed to keep policy rates on hold throughout 2026, even if a deal reduces near-term inflation fears.

To be clear, the bar for renewed tightening remains high. The Fed would need to see not only continued economic strength but also renewed firmness in core inflation and signs that inflation expectations are becoming less well anchored.

A prolonged Fed pause, provided it reflects resilient growth rather than inflation concerns, should not be disruptive for equities. Earnings momentum remains strong, and fundamentals continue to support markets. 

The more important market implication may therefore be more about broader market participation. Recent market leadership has been narrow, with gains concentrated in AI-related sectors. A de-escalation, however, should create scope for regions and sectors most exposed to the energy squeeze, most notably European equities, to begin catching up as conditions stabilize.

For investors, any progress toward ending the conflict and reopening the Strait would be supportive for markets, even if it does not materially change the Fed outlook. And a better energy backdrop should help reduce one source of pressure on growth and inflation expectations, which in turn could create room for market leadership to broaden. Such an environment reinforces the case for maintaining diversification and looking more closely at areas of the market that have lagged but could benefit as energy constraints ease and the macro environment becomes more stable.