Myopic stock market can no longer ignore war, investors say

Major U.S. stock indexes fell on Thursday as investors began pricing in the impact of a flare-up and prolongation of the Middle East conflict.

Domestic stocks were trading sideways as oil soared, largely dispelling any notion that war between the two countries would flare up again, while oil prices and Treasury yields both rose as the US carried out its 12th straight night of strikes against Iran.

But things changed on Thursday. brent crude oil Following reports of an attack on a tanker off the coast of Saudi Arabia, futures prices rose above $100 per barrel, and the yield on 10-year U.S. Treasury bonds exceeded 4.7%, the highest level since January 2025. The S&P 500 index is headed for its biggest decline in a month.

“These issues have become too big to ignore,” Steve Sosnick, chief strategist at Interactive Brokers, said of Thursday’s stock price movement. “It’s too hard to ignore $100 oil. It’s too hard to ignore 10-year rates above 4.70%. It’s too hard for the stock market to ignore 30-year rates that are definitely above 5%.”

Western Texas Intermediate Crude Oil Futures It soared 6% to $92 a barrel, up more than 28% from its lows of less than $70 a barrel earlier this month. The S&P 500 is currently down about 2% since the US overnight strike began on July 12th.

In March, after the war between the United States and Iran began, S&P500 It was down more than 7.5% at its low as oil prices soared nearly 70% and investors worried about stagflation, where soaring energy prices could reignite inflation and rising costs at the pump weigh on consumer spending.

A series of de-escalation announcements between the two countries and renewed confidence in artificial intelligence trade caused the S&P to rally sharply in April and May, despite various periods of hostilities.

But a big factor was the bet that President Donald Trump would find a way out to end the war rather than face the economic and political fallout of a protracted conflict.

“Since late March, we have consistently argued that stocks should take advantage of the weakness in stocks brought about by the Iran conflict, as in our view it is likely that a deal will eventually be reached,” JPMorgan equity strategists wrote in a note earlier this month. “The risk of a flare-up remains, but we think there should be some added upside on the back of unfavorable geopolitical headlines.”

Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, believes traders now need to reconsider the economic fears they had in March.

He said investors should be concerned about both rising inflation and the impact higher gas prices will have on consumers. Samana added that a flare-up in the conflict is a reason to brace for a significant drop in stock prices.

Sosnick said Thursday’s stock price also likely factors in tighter corporate borrowing conditions. According to CME’s FedWatch tool, there is a nearly 38% chance that the Federal Reserve will raise rates next week, while the probability of a rate hike at the central bank’s September meeting is more than 80%.

A week ago, those odds were about 12% and 53%, respectively.

Back in March, many analysts were surprised that the stock market initially reacted less to the conflict and concluded that the U.S. economy was in better shape than in the past to handle energy shocks. Michael Tunney, CEO of investment advisory firm Pellaeon Wealth, is betting on this again.

“In the short term, spike increases mean more to headlines than to client portfolios,” Tunney said. “If prices persist above $120, that will be the threshold where we see a severe trickle-down effect.”

—CNBC’s Deena Zaidi, Tanaya Macheel and Ananya Chetia contributed reporting