Wall Street is closely watching escalating tensions in the Middle East after President Trump confirmed that the US launched a surprise strike on Iran’s nuclear sites late Saturday, marking the country’s official entry into the two-week-old conflict.
Markets have held mostly steady in the aftermath of the escalation, although US stock futures fell across the board when trading opened Sunday evening.
Additionally, bitcoin (BTC-USD) prices, often viewed as a barometer of risk appetite, dropped over 1.6% to trade around $100,500 a coin. WTI crude (CL=F) and Brent (BZ=F) futures jumped, trading near $76 and $79 a barrel, respectively, as uncertainty looms over the potential closure of the critical Strait of Hormuz despite ongoing threats from Iran.
The latest surge follows oil’s third consecutive week of gains on Friday.
“We wouldn’t be surprised to see this spark a risk-off reaction in US equities and will be watching the futures closely on Sunday evening and Monday morning,” Lori Calvasina, head of US equity strategy research at RBC Capital Markets, wrote in a Sunday evening note to clients.
“It has been and remains our belief that the longer and broader the conflict becomes, the more challenging it could be for US equities,” Calvasina added. “These escalations come at a tricky time for US equities, as the S&P 500 has looked fairly valued to us (perhaps a bit overvalued) from a fundamental perspective, with more room to run from a sentiment perspective.”
The analyst said her three main concerns include: first, the risk that rising national security uncertainty could weigh on equity valuations; second, the possibility that renewed geopolitical tensions could stall the recovery in sentiment that began after the early April tariff lows; and third, the potential for a spike in oil prices, which could fuel inflation concerns.
In terms of sectors, Energy (XLE) tends to outperform when oil prices rise, while Consumer Discretionary (XLY) and Communication Services (XLC), along with Entertainment, Media, and Interactive Media, tend to lag behind the broader market, Calvasina noted.
Citi analyst Stuart Kaiser agreed that sharply higher oil prices remain “the channel for geopolitical risks to impact stock markets,” identifying crude prices “well above $80 a barrel” as a critical threshold for concern.
Kaiser added that options markets are now pricing in a 10% chance that oil surges 20% over the next month, up from just 2.5% two weeks ago, reflecting mounting tail risks as the conflict deepens.
Still, the analyst pointed to resiliency in stocks amid the volatility, saying, “Markets powered through extreme oil volatility and unstable geopolitical headlines to post a risk-on week.”
