Tariffs aren’t the only bearish signal on investors’ minds. Now they have to worry about a brewing war in the Middle East as well. The S&P 500 dropped 0.84% on Tuesday as reports emerged that President Trump was deciding whether to order military action against Iran as Israel wages a campaign to neutralize the country’s nuclear capabilities. Stocks fell across the board, though oil companies saw an increase as investors anticipated higher prices.
Meanwhile, investors are mulling how to price in a looming Federal Reserve decision on interest rates. Even as Trump pushes the central bank to cut rates, analysts expect the agency’s decision-makers to hold steady at its scheduled meeting on Wednesday, which has put further downward pressure on stock prices. “I think now [the Fed] particularly wants to assert their independence,” Melissa Brown, managing director of investment decision research at SimCorp, told Fortune, arguing it is likely to keep interest rates the same until it sees substantial evidence to act otherwise.
Growing instability
While Trump’s second term in office has been marked by volatility, much of the market chaos was spurred by his aggressive tariff strategy, rather than geopolitical strife. That could change as Trump weighs whether to deploy U.S. forces to the mounting conflict in Iran—an action that he previously opposed.
On Tuesday, Trump seemed to signal a more aggressive stance, calling for Iran’s “unconditional surrender” on his social media site, Truth Social, and threatening to kill Iran’s leader, Ayatollah Ali Khamenei. While Israel is now on the fifth day of its military campaign against Iran, analysts argue that it would need weapons power from the U.S. to attack Iran’s deepest nuclear enrichment site.
Stocks have fluctuated amid the escalating conflict, sinking last week before rebounding on Monday. But the heightened rhetoric on Tuesday spooked investors as Trump met with his national security team.
While a broader war could hurt sectors from tech to retail by disrupting supply chains, the energy sector could rally as Israel targets Iran’s oil and gas infrastructure. Oil prices have risen around 15% over the past five days.
Energy forecaster Dan Pickering told Fortune that Israel seems to be focusing on domestic fuel and power consumption, rather than global exports. “Everybody is taking a hands-off approach to oil [exporting] infrastructure because it meaningfully complicates and escalates the situation,” he said. “Israel doesn’t want to do that, and I don’t think Iran does either.”
Still, he cautioned, anything from a stray bomb to Iran deciding to block the Strait of Hormuz could dramatically impact the world’s oil supply. That could mean higher gas prices and myriad downstream effects for a wide array of industries.
“Right now, it looks like an inconvenience with a potentially temporary price spike. It could become much worse, so pay attention and cross your fingers it doesn’t escalate,” Pickering said.
