The market assumes a quick reopening of the Strait of Hormuz, but Iran is now financially better off. It sells its own oil at a premium and can potentially charge shipping tolls, creating a powerful incentive to maintain the disruption as long as possible.
The unreliability of US-policed global supply chains means nations can no longer count on converting financial assets like Treasuries into essential goods during a crisis. This will drive a structural trend of stockpiling physical commodities, from energy to fertilizer.
The semiconductor rally defies the energy crisis that should constrain AI. This suggests the market may be pricing in a deal where the US grants China access to high-end chips in exchange for China's help in resolving the Iran conflict and curbing inflation.
Contrary to its historical playbook of freezing its currency during global uncertainty, China is allowing the Renminbi to appreciate. This proactive move signals China's desire for a constructive outcome in upcoming talks with the US, making the RMB a key undervalued asset.
The market is complacent, assuming a resolution in May will avert a crisis. However, with global energy inventory buffers set to run out by early June and shipping taking six weeks, a major physical dislocation is already locked in, regardless of an immediate ceasefire.
The market's fixation on AI and semiconductors, now 17% of the S&P 500, resembles the 2008 'peak oil' narrative. Then, energy stocks soared while the broader financial system cracked, suggesting a similar cyclical peak and potential for a sharp reversal.
Saudi Arabia's incentives are changing. Rather than maximizing output and paying Iran a potential toll to use the Strait of Hormuz, they may find it more profitable to export fewer barrels at a much higher price exclusively through the Red Sea.
The S&P 500 can shrug off a major physical oil disruption because the initial, most severe shortages will hit developing nations first. This insulates developed market equities from the immediate impact, as the market prioritizes earnings over humanitarian crises.