The stock market fell on Friday as investors monitored the latest developments out of the Middle East and considered the path of future interest rate cuts by the Federal Reserve. The broad market S&P 500 index declined 0.22% to end at 5,967.84, marking its third consecutive losing session. The Nasdaq Composite dropped 0.51% to settle at 19,447.41, while the Dow Jones Industrial Average ticked up 35.16 points, or 0.08%, closing at 42,206.82.
Chip stocks came under pressure following a report by The Wall Street Journal about potential U.S. restrictions on some semiconductor manufacturers. Nvidia was down more than 1%, while Advanced Micro Devices slid nearly 2%. The trading session started on a positive note after Federal Reserve Governor Christopher Waller suggested the central bank could cut interest rates as early as July.
However, this optimism was tempered by Fed Chair Jerome Powell’s comments from Wednesday, indicating the Fed would remain data-dependent and was in no hurry to cut rates. President Donald Trump has been critical of Powell, arguing that delaying rate cuts has cost the U.S. economy “hundreds of billions of dollars.”
Tensions around the Israel-Iran conflict also added to market uncertainty. Reports indicated Israeli Prime Minister Benjamin Netanyahu ordered military strikes on “strategic targets” in Iran, with President Trump considering direct U.S. involvement.
“With so much uncertainty going on in this world, who really wants to go long over the weekend?” said Sam Stovall, chief investment strategist at CFRA Research. Stovall noted that the S&P 500 is still trading just around 3% below its recent 52-week high, suggesting multiple attempts might be needed to break through previous highs. For the week, the S&P 500 was down about 0.2%, the Dow Jones eked out a 0.02% gain, and the Nasdaq advanced 0.2%.
Since Israel’s missile strike on Iran on June 13, the S&P 500 has remained essentially flat. This includes a 1.0% rise on Monday, reacting to the U.S. strikes on Iran from June 21 and Iran’s subsequent retaliation. Futures tied to the major U.S. stock indexes rose amid hopes that a ceasefire between Israel and Iran could lay the groundwork for a more permanent end to hostilities.
As long as the response does not imminently threaten to spike oil prices, a large pain in stocks isn’t expected. Even if there is some downside action for stocks, history suggests it likely wouldn’t be long-lasting. Morgan Stanley Chief Investment Officer Mike Wilson analyzed more than 20 geopolitical shocks that have impacted markets since 1950.
On average, the S&P 500 was up 2% the month after geopolitical tensions spooked markets, 3% over the next three months, and 9% over the next 12 months, according to Wilson’s analysis. “History suggests most geopolitically-led sell-offs are short-lived and modest,” Wilson wrote. “Oil prices will determine whether volatility persists.”
While past performance is no indicator of future results, a large spike in oil prices could boost inflation and weigh on both business and consumer spending.
Additionally, there is concern that the angst over further escalation could hurt investor and consumer sentiment. These concerns are compounded by a market that’s already near record highs, with many stocks already richly valued.
Middle East tensions shake market confidence
However, WTI crude oil prices would have to rise at least 75% compared to the prior year to have a significant negative impact on stocks, according to Wilson’s findings. This would require oil to hit about $120 a barrel, a far cry from WTI’s sub-$71 level seen on Monday. Some reports suggest that Iran’s counterattack could be a sign of peak escalation in the conflict.
The odds of a Strait of Hormuz closure by the end of July fell to 11% on Monday, well off the recent high of 52% seen on Sunday. The market often quickly moves on because it is a forward-looking instrument. There may be more concerning headlines coming from the Middle East over the next few days or weeks, but the market believes the worst of the headlines is over.
“Often, geopolitical conflict has little to no effect on the U.S. economy,” Ritholtz Wealth Management Chief Markets Strategist Callie Cox wrote in a research note on Monday. “And if markets follow the economy and earnings over time, then it’s fair to say that war rarely has any long-lasting effects on the stock market.”
The market reaction to the recent U.S. engagement in the Iran-Israel conflict has defied expectations. Over the weekend, the United States launched direct attacks on Iranian nuclear sites, escalating tensions.
President Donald Trump stated that “there will be either peace, or there will be tragedy for Iran far greater than we have witnessed over the last eight days.”
Anticipating significant market turmoil, investors headed into Sunday’s futures open expecting oil prices to surge and equities to plummet. However, after an initial dip, stock futures were slightly higher by Monday morning, and crude oil futures, which initially traded up, had even dipped at some points. “Investors aren’t terribly panicked about an oil market calamity, an equanimous view that’s appropriate at this point,” wrote Adam Crisafulli of Vital Knowledge.
“Geopolitical risks are undoubtedly elevated in the Middle East right now, but our view remains that the extreme asymmetry of the conflict, coupled with Tehran’s relative isolation and ample global oil supplies, will help keep the fallout contained.”
While Iran has warned of retaliation against the U.S., its options appear limited. One potential move could be closing the Strait of Hormuz, a crucial shipping route for around 20% of the world’s oil. However, such an action could further isolate Iran internationally.
U.S. Secretary of State Marco Rubio urged China, a major buyer of Iranian oil, to discourage Iran from blocking the strait. “It’s economic suicide for them if they do it,” Rubio told Fox News on Sunday. “The next move is up to the Iranians,” wrote Ed Yardeni, president of Yardeni Research.
“Our bet is that they will sue for peace. If that’s the case, then the price of oil should fall and stock markets around the world should resume their ascents.”
U.S. crude oil briefly spiked to its highest level since January on Sunday night but was only fractionally higher by Monday morning. “The key question is whether Iran now retaliates vs.
U.S. interests in the region, triggering a massive U.S. response,” Alpine Macro chief U.S. strategist David Abramson noted. “Such a miscalculation by Tehran is possible — even likely. Either way, spikes in oil prices and risk-off market moves are possible, but are likely to fade quickly, given Iran is very ill-poised to win its conflict, especially if the U.S. intervenes again.”
The markets appear to be holding their breath, waiting to see what will unfold next in this high-stakes geopolitical chess game.
