The prolonged fighting linked to Iran has moved front and center for U.S. markets, as investors monitor how the conflict and a sizable jump in energy costs may alter inflation and growth prospects. With the U.S.-Israeli military posture against Iran stretching into a third week, an over 40% rise in oil has heightened concerns that inflation could remain elevated while economic momentum falters.
Those inflationary pressures have changed the interest rate outlook. Markets on Friday pushed back on the possibility of equity-friendly rate cuts this year that investors had earlier anticipated, and futures now show only limited odds of hikes arriving in 2026. At the U.S. central bank’s meeting on Wednesday, Federal Reserve Chair Jerome Powell described the ways the crisis could influence the economy as deeply uncertain, complicating the Fed’s ability to forecast future conditions.
U.S. stock indices ended the week sharply lower. The benchmark S&P 500 recorded its fourth consecutive weekly decline and dropped to a six-month low, while the Nasdaq Composite finished the week nearly 10% below its October all-time peak.
Geopolitics and oil
Tensions in the Middle East ratcheted up this week as Iran carried out attacks on energy infrastructure across the region after Israel struck one of Iran’s gas fields. In addition, U.S. officials told Reuters that thousands of U.S. Marines are being sent to the Middle East.
Market participants note the fluid nature of the situation. "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."
Disruptions have translated directly into swings in crude prices. U.S. crude traded near $98 a barrel late on Friday and Brent around $112, while global shipping and energy flows have been affected by traffic slowing through the Strait of Hormuz - a waterway typically used to move roughly one-fifth of the world's crude oil and liquefied natural gas.
Those price moves have reverberated through financial markets. The 20-day correlation between the S&P 500 and U.S. crude was a strong -0.89 late on Friday, indicating the two have tended to move in opposite directions in recent trading.
"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 - sector differences and technical considerations
Rising crude has helped the energy sector within the S&P 500, which includes oil company shares, but that group's weight in the benchmark is under 4 percent. The broader index is nevertheless down 6.8% from its record late-January closing high.
Market veterans noted the nature of the retreat in equities has been relatively orderly compared with past abrupt sell-offs tied to trade or tariff concerns. "This has been fairly orderly, which I think is an encouraging sign," said Fasciano. "And I think it’s because the underlying fundamentals for corporate America are still fairly robust and are offering some support."
Technical measures are also drawing attention. The S&P 500 closed below its 200-day moving average on Thursday for the first time since May, a widely watched long-term trendline. Continued weakness pushed the index to its lowest finish since September, slipping below November lows that strategists had flagged as important thresholds.
Fixed income, yields and investor calculus
Fast-rising Treasury yields have emerged as another headwind. The benchmark 10-year Treasury yield traded near 4.38% on Friday, its highest level since last summer. That rise reflects, in part, elevated energy prices and increased caution from central banks worldwide.
Higher yields can change the calculus for investors. "Rates going higher means borrowing costs are somewhat higher. And then that could actually slow the economy," said Keith Lerner, chief investment officer at Truist Advisory Services. Lerner said he was watching whether the 10-year yield holds sustainably above 4.3% and highlighted 4.5% as a key level, noting that elevated yields could make bonds relatively more attractive compared with equities.
Outlook, data and market focus in the near term
The week ahead looks relatively light for U.S. economic releases, with reports on manufacturing, services and consumer sentiment scheduled. Markets may instead take cues from energy developments and industry events; a major Houston energy conference that will gather senior executives from the oil sector could command attention from investors.
Events in Iran are expected to remain the primary risk to market stability. Analysts at UBS Global Wealth Management wrote on Thursday that recent actions are "pushing markets to price in a higher risk of prolonged conflict, deeper infrastructure damage and higher-for-longer crude prices." The UBS team added that while a less damaging outcome in the Strait of Hormuz is still possible, recent events have narrowed that path and raised the prospect of continued volatility.
For market participants, the immediate list of watch items is familiar: the trajectory of oil prices, shipping through key chokepoints like the Strait of Hormuz, movements in Treasury yields and whether stock indices hold or breach technical support levels. Together, those elements will shape expectations about inflation, corporate earnings prospects and the timing or likelihood of any policy easing by central banks.