When President Trump departed Beijing on Friday morning, markets did not react to what happened at the Trump-Xi summit. They reacted to what did not happen. No firm deal to reopen the Strait of Hormuz. No concrete framework to end the war with Iran. Vague commitments on agricultural purchases and 200 Boeing jets. By the time U.S. futures opened Friday, Nasdaq 100 contracts had fallen 1.3% and S&P 500 futures were down 0.9%. Oil climbed toward $108 per barrel on Brent. The TSX, which closed May 14 at 34,268, is set to open lower in a risk-off move driven almost entirely by a feeling of disappointment rather than a change in the underlying facts.
This is not a new geopolitical development. The Strait of Hormuz has been restricted to commercial traffic since March 4, 2026. Brent crude was already above $100 before the summit began. The Bank of Canada has already held its overnight rate at 2.25% in response to the inflationary pressures the war has generated. What changed between Thursday's close and Friday's premarket is not the risk. It is investor expectations. And those expectations, it turns out, were badly miscalibrated by the very cognitive biases that behavioral finance has studied for nearly fifty years.
What the Research Says About This Exact Pattern
Kahneman and Tversky's 1979 prospect theory, the foundational paper in behavioral finance, established that individuals feel the pain of losses approximately twice as acutely as they feel the pleasure of equivalent gains. This asymmetry is called loss aversion, and its consequences in markets are well-documented. When investors face uncertain outcomes and the most recent available information is negative, loss aversion does not merely bias them toward caution. It drives them to act. They sell to stop the pain, even when the rational calculation does not support selling.
The chart above shows the S&P 500's behavior in the 60 trading days following ten major geopolitical shock events since 2001 — instances where markets sold off sharply on news of incomplete resolution rather than new escalation. The pattern is consistent: median drawdown within the first five days of roughly 2.5%, with recovery to pre-shock levels within 30 trading days in eight of the ten cases.
Bars show S&P 500 return in the five trading days following each shock event; dots show the 30-day return. Green indicates full recovery within 30 days. The current 2026 Iran War drawdown reflects premarket conditions on May 15 and has no 30-day data point yet. The median day-5 drawdown across all ten events is -2.5%, consistent with this morning's premarket move.
The Availability Heuristic Is Doing Most of the Work
Beyond loss aversion, there is a second cognitive mechanism at work this morning: the availability heuristic, first described by Tversky and Kahneman in their 1973 paper in Cognitive Psychology. The availability heuristic describes the tendency of individuals to estimate the probability of an event by how easily they can picture it. When a scenario is vivid, recent, and emotionally charged, investors treat it as more probable than it actually is.
The scenario investors can picture right now is straightforward: the Strait of Hormuz remains closed, Brent crude pushes to $120 or beyond, inflation accelerates further above the Bank of Canada's 2% target, and the central bank is forced to raise rates from its current 2.25% hold. That scenario is not impossible. The IEA stated this week that oil markets will remain severely undersupplied until October even if hostilities end next month. But the availability of a bad outcome and the probability of that outcome are not the same thing, and in moments like this morning's, retail investors consistently conflate them.
The data on retail investor flows during geopolitical shock events is consistent with this conflation. A 2024 study published in Behavioural Public Policy, examining retail trading behavior during ten years of S&P 500 volatility, found that loss aversion and herding behavior combined to systematically amplify drawdowns beyond what fundamentals warranted. Investors who sold during the drawdown phases consistently locked in losses that those who held did not experience.
What Changed Overnight and What Did Not
The Trump-Xi summit produced a cordial conclusion with no major breakthrough. Trump said both countries "feel very similar about Iran" and that Xi assured him China would not supply military equipment to Tehran. The two agreed the Strait of Hormuz must be reopened. These statements are not nothing. China's explicit public endorsement of Hormuz remaining open, and Xi's commitment to withhold military support from Iran, are meaningful inputs into the diplomatic calculus around ending the war. But they are not a deal, and markets priced in a deal.
That gap between expectation and reality is the mechanism behind this morning's selling. Brent crude, which had eased toward $100 earlier this week on summit optimism, is back above $107 as of Friday premarket. The 10-year U.S. Treasury yield has climbed above 4.5% and the 30-year has crossed 5%, reflecting the market's reassessment that rate cuts are further away than hoped. Nasdaq 100 futures are down 1.3%. None of this reflects new information about the war itself. It reflects the unwinding of a hope that was never priced into fundamentals, only into sentiment.
For Canadian portfolios, the practical picture has not materially changed from yesterday. The TSX closed May 14 at 34,268, up 0.67%, driven by financial sector gains. Canada, as a large net oil exporter, has a structurally different exposure to elevated oil prices than most developed economies. The Bank of Canada acknowledged this explicitly in its April 29 Monetary Policy Report: higher oil prices increase national income for Canada even as consumers face higher gasoline costs. The inflationary pressure is real and the BoC's June 10 decision will be complicated by the April CPI print due May 19, which the Bank has projected will reach approximately 3%. But the framework has not changed because of what happened, or did not happen, in Beijing.