Futures tracking the Nasdaq and the S&P 500 dropped sharply on Friday as a spike in Treasury yields stoked concerns that inflation could accelerate due to the conflict in the Middle East. The 10-year U.S. Treasury yield reached 4.54%, marking its highest reading since early June 2025 and sending global bond yields higher.
Market participants said growing evidence that the Iran war may be inflicting economic damage prompted a reassessment of interest rate paths and growth prospects, with investors increasingly pricing in a faster-than-anticipated move by central banks.
According to CMEGroup’s FedWatch tool, the probability of the U.S. Federal Reserve raising interest rates by 25 basis points in December has more than doubled over the past week to about 40%. That shift in expectations came as energy markets tightened and headline inflation concerns resurfaced.
Oil prices climbed amid supply worries, with Brent crude rising almost 3% to $109 a barrel after the Strait of Hormuz remained closed. The disruption to a critical oil transit route intensified investor anxiety about future energy availability and its knock-on effect on inflation and borrowing costs.
"The longer the Middle East war drags on, the higher energy prices rise - fuelling inflation expectations and borrowing costs, and increasing the cost of building that extra data center," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. "This is a red flag that many tech investors have been ignoring, blinded by shiny earnings and even shinier earnings expectations."
By 05:38 a.m. ET, U.S. index futures showed steep losses: Dow E-minis were down 330 points, or 0.66%; S&P 500 E-minis were down 80.75 points, or 1.07%; and Nasdaq 100 E-minis were down 463.25 points, or 1.56%.
The pullback came after another session in which major U.S. equity benchmarks set records. The S&P 500 and the Nasdaq closed at all-time highs the prior day, the Dow Jones Industrial Average reclaimed the 50,000 milestone, and the S&P 500 surpassed 7,500 for the first time. Earlier market optimism had been driven in part by enthusiasm around artificial intelligence, which had helped prop up stocks despite geopolitical tensions.
Investors were also monitoring diplomatic developments, as a U.S.-China summit concluded on Friday without any major breakthrough. The two nations had discussed a broad agenda that included trade, tariffs, Iran and Taiwan.
In premarket company moves, semiconductor equipment maker Applied Materials fell 2.8% despite forecasting third-quarter revenue and adjusted profit above Wall Street estimates. Medical device maker Dexcom rose 2% after announcing it will appoint two independent directors and overhaul a key board committee in cooperation with activist investor Elliott Investment Management.
Airline stocks were broadly weaker as rising oil prices added pressure to the sector. Delta Air Lines, United Airlines and Southwest Airlines fell between 1.3% and 1.5%, while Alaska Air shares declined 1.8%.
Markets entered the trading day facing a tension between recent record-high equity readings and renewed concerns that geopolitical developments could push inflation and interest rates higher, a dynamic that investors said may slow momentum in asset classes that had benefited from the recent AI-driven rally.