Stocks Decline as Middle East Tensions Escalate

Global financial markets experienced a downturn on Monday, with major U.S. stock indexes closing lower amidst a significant escalation of tensions in the Middle East. The S&P 500 Index fell by -0.41%, the Dow Jones Industrial Average saw a more substantial drop of -1.13%, and the Nasdaq 100 Index closed down -0.21%. Futures markets mirrored this sentiment, with June E-mini S&P futures (ESM26) declining -0.42% and June E-mini Nasdaq futures (NQM26) dropping -0.22%.

Oil Prices Surge, Inflation Fears Mount

The primary catalyst for the market’s retreat was a dramatic surge in WTI crude oil prices, which climbed over +4% on Monday. This spike followed reports of an exchange of fire between the U.S. and Iran in the critical Strait of Hormuz. The heightened geopolitical risk immediately fueled inflation expectations, pushing bond yields higher. The 10-year T-note yield, a key indicator, rose to a 5-week high of 4.46%.

Early Gains Erased Despite Positive Economic Signals

Despite an initial rally that saw the Nasdaq 100 reach a new all-time high, market optimism quickly faded. Early support came from signs of corporate resilience and continued confidence in AI investment driving earnings growth, with AI-infrastructure stocks and software companies showing strength. Furthermore, stronger-than-expected U.S. March factory orders, which rose by +1.5% month-over-month (the biggest increase in four months), initially signaled economic strength.

Fed Comments Offer Limited Support

Comments from New York Fed President John Williams on Monday were perceived as dovish, offering some underlying support for stocks. Williams stated, "Inflation is higher this year than previously expected, so that pushes off a date of lowering interest rates, but it doesn’t change the basic story that rates will need to come down at some point if inflation returns to the Fed’s 2% target."

Strait of Hormuz: A Geopolitical Flashpoint

The Strait of Hormuz remains a focal point of global concern. Reports indicated that President Trump announced the U.S. would guide neutral ships through the strait, with U.S. Central Command pledging military support, including guided-missile destroyers, aircraft, and drones. The United Arab Emirates (UAE) reported an Iranian drone attack causing a fire at the Fujairah oil industry zone and an attack on a South Korean cargo ship. The UAE also issued a missile threat warning after an oil tanker was struck by Iranian drones. U.S. Central Command confirmed its forces repelled attacks from Iranian drones, missiles, and armed small boats while facilitating the passage of U.S.-flagged vessels.

The strait, through which approximately one-fifth of the world’s oil and liquefied natural gas transits, is essentially closed, leading to significant market disruption. Goldman Sachs estimates this disruption has already depleted nearly 500 million barrels from global crude stockpiles, with a potential drawdown of 1 billion barrels by June.

Interest Rates and Bond Market Reaction

The bond market reacted sharply to the rising tensions and inflation fears. June 10-year T-notes (ZNM6) closed down by -15 ticks, pushing the 10-year T-note yield up +6.7 basis points to 4.437%, reaching a 5-week high of 4.462%. The 10-year breakeven inflation rate climbed to a 3-year high of 2.526%. The stronger U.S. March factory orders report also contributed to bearish sentiment in T-notes. Additionally, the U.S. Treasury’s revised Q2 net borrowing estimate of $189 billion (up $80 billion from February) suggests increased supply pressures. European government bond yields also rose, with the 10-year German Bund yield up +5.0 basis points to 3.087%.

Corporate Earnings and Global Markets

Despite the geopolitical headwinds, corporate earnings have largely been supportive. As of Monday, 82% of the 322 S&P 500 companies reporting Q1 earnings have surpassed estimates. Q1 S&P 500 earnings are projected to climb +12% year-over-year, though stripping out the technology sector, the increase is a more modest +3%, the weakest in two years.

Overseas stock markets generally settled lower. The Euro Stoxx 50 closed down -2.00%. Markets in China and Japan were closed for public holidays (Labor Day and Greenery Day, respectively).

Key Stock Movers

• Freight Operators Decline: Amazon’s launch of Amazon Supply Chain Services led to significant drops for freight companies. GXO Logistics fell over -17%, United Parcel Service over -10%, FedEx and CH Robinson Worldwide over -9%, and Old Dominion Freight Line over -6%.
• Home Builders Retreat: Rising 10-year T-note yields, signaling higher mortgage rates, impacted home builders. KB Home dropped over -6%, DR Horton and Lennar over -4%, and Pulte Group and Toll Brothers over -3%. Home Depot also fell over -3%.
• Cruise Lines Lower: Norwegian Cruise Line Holdings plunged over -8% after cutting its full-year adjusted Ebitda forecast. Carnival and Royal Caribbean Cruises also saw declines.
• Chipmakers and AI Stocks Gain: Micron Technology surged over +6%, and SanDisk over +5%, leading gains in the Nasdaq 100, reflecting continued optimism in AI infrastructure.
• Software Sector Strong: Atlassian, Oracle, and Datadog rose over +4%, with Cadene Design Systems up over +2%, indicating strength in software.
• Cryptocurrency-Exposed Stocks Rally: Bitcoin’s rise of over +6% fueled gains in Strategy, Galaxy Digital Holdings, and MARA Holdings (all up over +3%).
• GameStop and EBay: GameStop fell over -9% after proposing to buy EBay for $125 per share. EBay, conversely, rose over +5% on the news.
• Tyson Foods Jumps: Tyson Foods gained over +7% after reporting better-than-expected Q2 sales.
• Celcuity Soars: Celcuity rose over +15% after its Phase 3 trial met its primary endpoint.
• GlobalFoundries and Amazon.com Upgraded: GlobalFoundries gained over +4% after an upgrade from Cantor Fitzgerald. Amazon.com rose over +1% following an upgrade from Fubon Securities.