Global markets head into the coming week focused on two intertwined questions: how far the recent conflict in the Middle East will spread and whether fresh inflation data will alter the outlook for economic growth and interest-rate policy.
The U.S.-Israeli campaign against Iran moved into its sixth day as of Thursday, a development that has dominated trading floors and contributed to elevated volatility across asset classes. The spike in oil prices was a particular driver of market swings, leaving the benchmark S&P 500 down 0.7% for the week as of Thursday.
Investor unease was visible in volatility measures earlier in the week when the Cboe Volatility Index - Wall Street’s most-watched gauge of anxiety - rose to levels not seen since November. Market participants are balancing the historical tendency for equities to recover after major geopolitical shocks against the present lack of clarity about how the Iran situation will evolve.
"This is a very big event and it seems incredibly uncertain where it’s headed," said Rick Meckler, partner at Cherry Lane Investments. "To some extent, it’s left investors as neither sellers nor buyers."
Energy prices and the impact on markets
A central market concern is how far oil will climb amid the disruptions. The conflict has effectively paralyzed shipping through the Strait of Hormuz, a maritime chokepoint that handles roughly a fifth of the world’s oil and liquefied natural gas shipments. Brent crude reached $85 a barrel on Thursday, up from $70 before the weekend strikes.
Rising crude costs can weigh on equities in several ways, including by pushing up gasoline prices and thereby weakening consumer spending. Michael Arone, chief investment strategist at State Street Investment Management, said oil price movements will serve as "a good barometer for whether risk assets will do well or they will do poorly." He added that oil crossing $100 a barrel would be a psychological threshold that "would spook markets more."
Even after the weekly decline, the S&P 500 remained just over 2% below its all-time closing high set in late January, reflecting a degree of optimism around economic fundamentals and anticipated corporate earnings growth for the year that has partly offset other worries, such as disruption from artificial intelligence and strains in private credit.
"Developments in the Middle East will move really all financial markets," said Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, underscoring the potential breadth of the current geopolitical shock.
Inflation data to test market assumptions
Alongside geopolitical news, traders are watching U.S. inflation figures due next week. The consumer price index for February is scheduled for release on Wednesday, following a softer-than-expected January reading for the gauge. A Reuters poll of economists expected the CPI to show a 0.2% increase on a monthly basis for February.
Because the CPI report will largely cover activity before the recent Middle East escalation, some market participants suggested that a tame reading could be discounted. Still, the possibility of an upside surprise in inflation is a key concern.
"If we get upside surprises to the inflation data next week, that could further fuel fears about inflation expectations rising and that would be bad for markets," Arone warned. "The concern is that higher oil prices will only feed into higher inflation dynamics going forward."
Implications for monetary policy and rate-cut timing
Growing concern that energy-driven inflation could prove persistent has already altered expectations for when the Federal Reserve might begin easing policy. Market-implied odds for a 25-basis-point cut at the Fed’s June meeting have declined to about 32% according to CME FedWatch, down from 47% a week earlier and 75% a month earlier.
Last year the central bank lowered rates to support a weakening labor market, and hopes for further easing this year - roughly two quarter-point cuts - have been an important element of the bull case for stocks because investors tend to associate lower interest rates with higher asset prices.
Pappalardo said rising energy prices and the attendant inflation worries would make it "much more difficult for the Fed to implement those two forecasted rate cuts in 2026."
What investors face next week
With both the trajectory of the Middle East conflict and the February CPI report unresolved, market participants must weigh geopolitics and incoming economic data in quick succession. Energy price movements will likely be monitored as a near-term indicator of how broad financial markets may respond, while the CPI print could either reassure markets if tame or amplify concerns if it surprises to the upside.
Given the current combination of geopolitical uncertainty and inflation risk, market reactions could remain volatile until clearer signals emerge on both fronts.