Markets remain focused on the unfolding Middle East crisis, with developments in Iran and the ramifications of surging energy costs dominating investor attention. The U.S.-Israeli campaign involving Iran has entered its third week and a greater than 40% rise in oil prices has amplified worries about rising inflation and the prospect of slower economic growth.
Those inflationary pressures have contributed to markets largely dismissing the equity-friendly interest rate cuts many investors had anticipated for this year. Federal Reserve Chair Jerome Powell, speaking at the U.S. central bank’s policy meeting on Wednesday, signaled considerable uncertainty about how the conflict will feed into the U.S. economy, complicating the Fed’s ability to forecast conditions ahead.
The benchmark S&P 500 index was on track for a fourth consecutive weekly decline as investors weighed the economic and market implications of the crisis.
Geopolitical flare-up and energy market reaction
Tensions in the Middle East intensified this week after Iran launched attacks on energy facilities across the region in response to Israeli strikes on one of Iran’s gas fields. Those strikes, together with other disruptions, have contributed to a sharp rise in crude prices and to traffic disruptions in the Strait of Hormuz, a sea lane through which about one-fifth of the world’s crude oil and liquefied natural gas normally transits.
U.S. crude briefly reached $100 a barrel on Thursday, while Brent crude was trading around $110. The spike in oil has rippled through financial markets and become a leading indicator for some traders evaluating the conflict’s likely trajectory and impact on markets.
"This is a situation that’s so fluid," said Chris Fasciano, chief market strategist at Commonwealth Financial Network. "We could have a resolution in the next week or it could go on for some time. And the longer it goes on, you start to think about the impacts it could have on the U.S. economy."
Market data point to a strong inverse relationship between crude and equities. The 20-day correlation between the S&P 500 and U.S. crude stood at -0.926 as of Thursday morning, according to LSEG data, indicating they have tended to move in opposite directions during the recent volatility.
"If you’re a trader, you watch oil prices because I do think that that’s generally giving the leading indicator as to how the financial markets are viewing the outlook for the conflict," said Eric Kuby, chief investment officer at North Star Investment Management Corp.
Equities: sectoral shifts and technical levels
The energy sector within the S&P 500 has strengthened since crude began its late February ascent, though the group comprises less than a 4% weight in the benchmark index. Despite gains in energy names, the broader market has pulled back: the S&P 500 was down just over 5% from its record closing high set in late January.
Market participants said the current retreat in equities has lacked the abrupt, chaotic character seen during some prior selloffs. "This has been fairly orderly, which I think is an encouraging sign," Fasciano added. "And I think it’s because the underlying fundamentals for corporate America are still fairly robust and are offering some support."
Still, technical indicators warrant attention. The S&P 500 closed at 6,606.49 on Thursday, slipping below its 200-day moving average for the first time since May. Adam Turnquist, chief technical strategist for LPL Financial, cautioned that a further breakdown would raise questions about the bull market’s durability. He said a move below the 200-day trendline, "especially if followed by a breach of the November lows at 6,522, would raise more serious questions about the staying power of this bull market."
Fixed income and rates
Rising Treasury yields, pushed higher in part by the energy-driven inflation outlook and by caution from global central banks, represent another risk for equities. The benchmark 10-year U.S. Treasury yield climbed to 4.328% on Thursday, its highest level since August, before easing back slightly.
Keith Lerner, chief investment officer at Truist Advisory Services, said he was monitoring whether the 10-year yield could sustain a move above 4.3%. "Rates going higher means borrowing costs are somewhat higher. And then that could actually slow the economy," Lerner said. "At some point if they keep going higher, then the relative attractiveness of (bond) yields becomes more attractive relative to equities."
Economic data and events to watch
This week is light on U.S. economic releases, with reports on manufacturing and services activity and on consumer sentiment scheduled but not expected to be market-moving. Market participants will also be watching a major energy conference in Houston that is set to draw senior executives from across the global industry and could draw Wall Street’s attention.
Despite the focus on energy, analysts say developments in Iran are likely to remain the dominant factor shaping market expectations. In a Thursday morning note, analysts at UBS Global Wealth Management said recent events were "pushing markets to price in a higher risk of prolonged conflict, deeper infrastructure damage and higher-for-longer crude prices." The UBS analysts added that "while a less damaging outcome in the Strait of Hormuz remains possible, recent events have narrowed that path and heightened the risk of continued volatility."
Market implications and investor posture
Investors now face a mix of elevated oil prices, rising interest rates and heightened geopolitical risk. Those forces are leading many market participants to recalibrate the timing and likelihood of central bank policy easing and to reassess asset allocations. The balance between sectoral winners, such as energy stocks, and the broader negative pressure on risk assets will likely depend on the conflict’s duration and any further disruption to energy infrastructure and shipping lanes.
For now, market participants described the situation as fluid and uncertain, with paths ranging from a relatively rapid resolution to a prolonged period of elevated prices and volatility. The coming days and weeks will be watched closely for developments that could determine whether current moves remain orderly or evolve into deeper market stress.
Note: The article includes perspectives from market strategists and analysts quoted above and reports market prices, correlations, index levels and yield figures as stated.