MW An Iran deal could actually trigger a painful stock-market selloff, despite Wall Street's optimism

By Joseph Adinolfi

A deal announcement might not be the big 'risk on' outcome that Wall Street is expecting

An Iran deal might not be the "risk-on" catalyst that everybody is expecting.

Across Wall Street, investors are assuming that a credible and lasting deal between the U.S. and Iran would be an unmitigated positive for stocks and other risky assets.

As logical as this might seem at first blush, it could ultimately prove to be misguided, according to one top Wall Street strategist.

Rather than rallying further, an announcement of a credible deal between the U.S. and Iran - one that would at least temporarily reopen the Strait of Hormuz - might be just the thing that catalyzes a painful pullback for indexes like the S&P 500, according to Charlie McElligott, cross-asset strategist at Nomura.

Gamma squeeze

Firstly, the market often does the opposite of what investors expect, McElligott said.

But over the past two months, an aggressive "gamma squeeze" has contributed to the stock market's rapid rebound from the first-quarter selloff. Since the end of March, the S&P 500 SPX has risen by 15.9%, and the Nasdaq Composite Index COMP by 24.5%. A "gamma squeeze" happens when aggressive buying of bullish call options pushes shares of a stock higher as market makers scramble to hedge their positions.

The PHLX Semiconductor Index SOX has gained more than 70% as a supply bottleneck of even basic high-bandwidth memory chips has sent shares of Micron Technology $(MU)$, Intel $(INTC)$ and other hot chip stocks higher. Beyond the U.S., it has also helped to fuel a raging rally in the South Korean market that is largely being driven by just two stocks.

Aggressive positioning shifts and heavy use of leverage - across options and ETFs, as well as individual stocks - have helped to turbocharge the market's advance, according to McElligott and others. Furthermore, sophisticated investors running popular hedge-fund strategies have been selling short shares of cyclical stocks and value stocks to boost their returns.

This last bit is what could trigger the unwind. A deal announcement would likely send interest rates and the U.S. dollar DXY lower, while simultaneously helping to revive investors' appetite for beaten-down stocks in sectors like healthcare or consumer discretionary.

If that happens, investors might need to sell positions in hot tech names to chase the rotation. Such a rebalancing into sectors that are more economically sensitive would likely weigh on indexes like the S&P 500, given that the technology sector has the heaviest weighting.

Analysts at Goldman Sachs have also pointed out the rising short interest in the market, saying it could lead to a short squeeze in names that investors are betting against aggressively. The median S&P 500 stock carries short interest equivalent to 3% of its market capitalization, a Goldman analyst said in a trading-desk note shared with MarketWatch. That is the highest level since 2011, according to Goldman's data.

To be sure, the rally could also run out of steam on its own, McElligott said. Investors should keep an eye on trading activity in call options, McElligott said. Once demand for calls tied to hot megacap and semiconductor names starts to slacken, it could be a sign that a selloff is imminent, he said.

-Joseph Adinolfi

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May 28, 2026 17:00 ET (21:00 GMT)

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