Geopolitical risks intensified, leading to a decline in US stock markets and a surge in oil prices. This followed comments from former US President Donald Trump suggesting a ceasefire with Iran might be over, sparking fears of a potential return to full-scale conflict.
Nearly 400 components within the S&P 500 index fell, though the index pared its losses after Trump later indicated he did not believe a broader conflict would erupt. Chipmakers were among the gainers.
Renewed hostilities in the Persian Gulf threatened to bring a fresh wave of disruption to energy markets, with Brent crude oil briefly rising above $80 per barrel. This rekindled inflation concerns, prompting money markets to increase bets on the Federal Reserve raising interest rates by October.
The spike in oil prices coincided with the market downturn.
The US military stated it conducted strikes against Iran for a second consecutive day, raising the risk that escalating violent clashes could put further strain on an already fragile ceasefire. This came just hours after Trump had said the US could strike again and potentially reimpose a blockade on Iranian ports.
These actions represent the most significant threat to date to negotiations aimed at reaching a broader agreement to end the war.
"Earlier this week, markets initially didn't fully price in the renewed escalation of US-Iran tensions," said Fawad Razaqzada of Forex.com. "But today, that appears to have changed."
Angelo Kourkafas of Edward Jones noted that while the resurgence of geopolitical risk could fuel some safe-haven sentiment in the near term, both the US and Iran seem to have little appetite for a prolonged conflict. He also pointed out that investors have seen that reacting to fast-changing headlines can lead to suboptimal portfolio performance.
"Oil prices would likely need to see a much larger and sustained increase to materially alter the economic and corporate earnings outlook," he added.
Veteran strategist Ed Yardeni stated that a breakdown in the US-Iran ceasefire could trigger another acceleration in prices, which in turn might force the Federal Reserve to hike rates.
Several Fed officials at their most recent policy meeting indicated there was a case for raising interest rates, though they ultimately supported the decision to hold them steady. More broadly, the June meeting minutes revealed that officials' concerns about inflation had intensified while their worries about the labor market had eased slightly.
"One thing is certain: future policy is heavily dependent on Middle East politics," said Jeffrey Roach of LPL Financial. "If there's any forward guidance to be gleaned from the minutes, it's that the committee is assessing multiple scenarios and won't commit to a specific one until incoming data provides the necessary clarity."
At the US market close, the S&P 500 index was down 0.3% at 7,482.71 points.
The Dow Jones Industrial Average fell 1.1% to 52,348.39 points.
The Nasdaq Composite Index rose 0.2% to 25,870.65 points.
The Nasdaq 100 Index gained 0.3% to 29,252.56 points.
The Russell 2000 Index declined 0.9% to 2,956.389 points.