Hormuz Became a Market Variable

At the beginning of May, the market was still trying to understand the scale of the disruption in the Gulf. The Strait of Hormuz was no longer treated merely as a geopolitical flashpoint. It became a financial transmission channel. News about shipping routes, naval operations, tanker movements, Iranian responses, U.S. military positioning and possible mediation efforts quickly affected oil, currencies and bonds.
The early part of the month showed how sensitive investors had become to headlines. When there were signs of de escalation or discussion of a framework for negotiations, oil prices fell and equities gained. When reports suggested renewed confrontation, attacks near Gulf energy infrastructure, or a breakdown in talks, oil moved higher, the dollar strengthened and bond yields rose.

This created a new market pattern. Oil was not just a commodity price. It became a proxy for the probability of escalation. A lower oil price signaled that markets were assigning more weight to diplomacy and reopening. A higher oil price signaled that investors were again preparing for supply disruption, higher inflation and a more hawkish central bank response.

Geopolitical and Inflation Risk

The second week of May was the point at which the market began to shift from treating the crisis as a geopolitical shock to treating it as an inflation shock.

U.S. inflation data reinforced that concern. CPI and PPI readings came in stronger than expected, while oil remained near or above psychologically important levels. Investors began to price the possibility that the energy shock was not temporary. If higher oil and transport costs fed into goods, services and inflation expectations, the Federal Reserve would have much less room to cut rates.
This was the key macro transition of the month. At the start of May, markets could still imagine a scenario in which geopolitical risk faded quickly and the Fed eventually returned to a more supportive policy stance. By mid of May, that assumption had weakened. Strong inflation data, high energy prices and resilient U.S. consumption made the case for "higher for longer" policy more credible.
Fed officials reinforced that message. Their comments repeatedly pointed to the risk that an energy shock could make inflation more persistent. Several remarks suggested that rate cuts were not near term priorities, and that further tightening could not be ruled out if inflation expectations became unanchored.

For equity markets, this mattered enormously. The rally in risk assets had partly depended on the idea that inflation would gradually cool and that interest rate pressure would eventually decline. The May data challenged that assumption.

AI Kept Wall Street Alive

Despite the pressure from oil, inflation and bond yields, U.S. equities did not collapse. The reason was clear: artificial intelligence remained the strongest growth narrative in the market.
AI related stocks, semiconductor companies and data center infrastructure names continued to attract capital. Nvidia, Micron, Cisco and other technology linked companies played an outsized role in market sentiment. Strong earnings guidance and resilient demand for AI infrastructure helped offset some of the pressure coming from higher rates.

This was one of the defining contradictions of May. The macro backdrop was difficult, but the AI story remained powerful enough to keep the equity market alive. Investors were willing to look through geopolitical volatility when corporate earnings, especially in technology, continued to support the idea of a structural investment boom.
However, the AI trade also became more fragile. As valuations rose, expectations became harder to beat. A strong earnings report was no longer enough on its own; investors wanted evidence that growth could remain strong despite higher capital costs, energy pressure and global uncertainty. Hedge-fund profit taking in semiconductor stocks also suggested that the trade was becoming crowded. That did not mean investors had lost faith in AI, but it did mean risk management was becoming more important.

The result was a market where AI acted as the engine of equity resilience, while oil and bond yields acted as the brakes.

Bonds Became the Real Pressure Point

By mid of the month, the bond market had become one of the most important sources of pressure on equities. U.S. Treasury yields moved higher, with the 10-year yield trading around the mid-4% range and the 30-year yield remaining above 5% at key points. The selloff was not limited to the United States. Long-end yields in Japan and the United Kingdom also came under pressure, reflecting a broader global repricing of inflation and fiscal risk.
This mattered especially for technology stocks. Growth equities are highly sensitive to discount rates because much of their value depends on earnings expected far in the future. When yields rise, the present value of those future earnings falls. That is why the Nasdaq and semiconductor stocks came under pressure whenever oil and yields moved higher together.

The bond market therefore became the bridge between the energy shock and equity valuations. Higher oil increased inflation risk. Higher inflation risk increased the probability of tighter policy. Tighter policy pushed yields higher. Higher yields challenged the valuation of growth stocks.
This chain was one of the most important dynamics of May 2026.

The Dollar Benefited From Both Fear and Policy

The U.S. dollar was another winner of the May regime. It was supported by two forces at the same time.

First, the dollar benefited from risk aversion. When tensions in the Gulf intensified, investors moved toward safer and more liquid assets. Second, the dollar benefited from the possibility of tighter Federal Reserve policy. Stronger inflation data and resilient U.S. economic activity gave the dollar a yield advantage, especially against currencies exposed to imported energy costs.

The yen was one of the clearest examples. USDJPY repeatedly moved toward sensitive levels, with markets watching the 155-160 area as a possible intervention zone. Japan faced a difficult mix: imported energy pressure, a weak currency and a central bank still moving cautiously. Even when Japanese inflation data softened, investors remained focused on the broader challenge of maintaining currency stability in a world of high U.S. yields.

The euro and pound also faced pressure at different points. In Europe and the United Kingdom, the risk was not only inflation but also growth. Higher energy prices threatened consumers, industry and political stability. That made the dollar look attractive not only as a safe haven, but as a currency backed by a more resilient economy and a more hawkish central bank.

China Was No Longer Just a Trade Story

The Trump–Xi meeting in Beijing was another major theme of the month. Markets initially hoped that the meeting could produce trade progress, support for reopening energy routes, or some form of Chinese cooperation on Iran. In practice, expectations were gradually reduced.
The meeting was less about a grand bargain and more about managing instability. Trade, technology restrictions, Taiwan, fentanyl, agricultural purchases and Iran were all part of the broader conversation, but none of them produced a decisive breakthrough.

Still, China mattered deeply to the market narrative. Beijing was not only a trade rival or a technology competitor. It was also a key player in the energy and geopolitical equation. Its relationship with Iran, its purchases of energy, its control over technology transactions and its exchange rate management all affected market expectations.
The strengthening of the yuan during parts of the month also signaled that Chinese authorities were trying to manage financial conditions carefully. A stronger yuan helped stabilize sentiment and suggested that Beijing wanted to avoid disorderly currency pressure during a sensitive diplomatic period.

But the broader conclusion was clear: China could help reduce market stress, but it was not going to solve the crisis alone.