As the Middle East conflict escalates, investors are reassessing popular themes and trades for 2026. Global stock markets have plunged, the U.S. dollar has strengthened, and traders have reduced their bets on Federal Reserve interest rate cuts.

Investors had previously positioned for growth this year. "Stagflation shock was not in the plan," said Chris Turner, Global Head of Markets at ING.

Investors are adopting a cautious stance, and there are still more positions that may need to be unwound.

Here are five popular themes being "upended" by the Middle East conflict.

1/ Dollar Shorts Get Squeezed Just last month, investors had built their largest bearish bets against the U.S. dollar since at least 2021, according to data from a U.S. market regulator. Market expectations for Fed rate cuts had not prompted significant buying of the dollar.

However, the dollar's strong rally since last November indicates a flight to safe-haven assets.

"The U.S. dollar is the biggest winner from the Middle East conflict," said Ipek Ozkardeskaya, Senior Analyst at Swissquote. The U.S. will be more resilient to an energy shock.

"The U.S. has become a net energy exporter, importing only 17% of its energy needs, the lowest level in 40 years," noted Jean-Francois Robin, Head of Global Analysis at Natixis.

2/ Global Stocks Retreat Global stock markets, which began 2026 with a consensus "buy stocks" outlook, have fallen sharply.

Following a U.S.-Israel attack on Iran, the MSCI All Country World Index ex-U.S. dropped abruptly. In contrast, the S&P 500 remained stable as investors favored the U.S. due to its lower dependence on energy imports.

"If inflation remains high due to energy, then 'valuation multiples rather than earnings' are the weakest link," said Lale Akoner, Global Market Strategist at eToro.

She added that earlier signs of market leadership broadening beyond the U.S. have faded as investors return to the depth and liquidity of the U.S. market.

The shock could drive capital towards energy-rich markets and weigh on energy-dependent nations, potentially preventing a rotation of funds from the U.S. to Europe and Asia, according to Swissquote's Ozkardeskaya.

3/ Emerging Markets Hit Hard Emerging market currencies and stocks had performed well early in the year. The MSCI Emerging Markets Currency Index rose 1.9%, while emerging market equities surged over 15%.

Last week, these indices fell by 7% and 1.5% respectively, with even previously strong performers like South Korea's KOSPI experiencing sharp declines.

In a report on Wednesday, Goldman Sachs told clients that this week's worst-performing currencies were among the best performers from January to February.

De-risking was most pronounced in markets seen as vulnerable to Middle East and oil shocks, such as Egypt and the UAE, as well as last year's top performers like South Korea, Brazil, and South Africa. On Tuesday, J.P. Morgan analysts downgraded emerging market currencies in Europe, the Middle East, and Africa from "market weight" to "underweight" and added the Polish Zloty to their list of "underweight" currencies. J.P. Morgan stated that Central and Eastern Europe are particularly exposed to energy price risks.

4/ Fed Rate Cuts in Doubt Rising energy prices have sparked inflation concerns, leading traders to scale back expectations for Federal Reserve rate cuts.

Before the conflict began, markets priced in a 50% probability of a rate cut at the June meeting, which would have been the first under the new Chair's term. That probability has now fallen to around 25%. Recent energy prices have also prompted traders to reduce expectations for Bank of England rate cuts.

"Some of the biggest moves in G10 central bank pricing for 2026 have been in economies that were previously priced for further easing this year," Goldman Sachs said.

5/ Bank Stocks Investors are reevaluating the economic impact of potential disruptions in the Strait of Hormuz.

Higher energy costs have intensified concerns about a resurgence of broader inflationary pressures, which could lead to slower lending and weaker credit demand.

While higher interest rates typically support bank margins, they can also reduce borrowing. Furthermore, renewed inflation worries may constrain investment.

"The main risk to watch is credit spreads," said eToro's Akoner.