The escalating conflict between Israel and Iran sent shockwaves through financial markets on Tuesday, with the Dow Jones Industrial Average shedding nearly 300 points. Investors closely monitored developments in the Middle East as the conflict entered its fifth day. President Donald Trump intensified his rhetoric towards Iran, threatening its Supreme Leader, Ayatollah Ali Khamenei, in multiple posts on Truth Social.
He stated, “We know exactly where the so-called ‘Supreme Leader‘ is hiding. He is an easy target, but he is safe there — we are not going to take him out (kill him), at least not for now. But we don’t want missiles shot at civilians or American soldiers.
Our patience is wearing thin.”
Trump met with his national security team in the White House Situation Room on Tuesday afternoon. At the same time, the Pentagon relocated assets to the Middle East to enhance the U.S. military’s defensive capabilities and expand President Trump’s options. This follows Trump’s call for the immediate evacuation of Tehran and his early departure from the G7 summit in Canada to address the escalating situation. French President Emmanuel Macron revealed that Trump had offered a ceasefire between Iran and Israel, though any concrete agreements from the G7 summit remain unclear.
Deutsche Bank strategist Jim Reid noted that there is uncertainty about whether any substantive results emerged from the summit. Oil prices surged as the Middle East conflict escalated, reversing declines seen on Monday when there was hope for a ceasefire.
Dow reacts to Middle East tensions
The contract for July delivery gained $3.07, or 4.28%, to close at $74.84 per barrel, while the global benchmark for August rose $3.22, or 4.4%, to $76.45. Consumer spending data also weighed on stocks, with retail sales declining 0.9% in May, worse than the Dow Jones forecast for a 0.6% fall. Chris Rupkey, chief economist at Fwdbonds, commented, “The economy is slowing with consumers nervous about exactly what lies ahead and are choosing to save overall rather than flash some cash at the shops and malls.
Notable stock movements included Jabil Inc., which surged nearly 12% after lifting its full-year guidance and posting strong quarterly earnings.
Energy stocks also advanced, buoyed by rising oil prices, with the S&P 500 energy sector up 1%. JetBlue fell 3.4% intraday after CEO Joanna Geraghty indicated that softer-than-expected demand made break-even operating margins unlikely this year. Other airlines also saw declines, including American Airlines and Southwest Airlines.
David Bianco, the investing chief at DWS Group, suggested that investors may want to look beyond technology stocks given their high valuations. He recommended defensive stocks with strong pricing power, such as utilities and health care, as potential alternatives. Ross Mayfield at Baird indicated that while the retail sales data added some uncertainty, it might allow the Federal Reserve to adopt a more dovish stance in future meetings.
Markets were previously pricing in two quarter-percentage-point cuts this year, starting at the Fed’s September meeting. The broader market was weighed down on Tuesday by megacap technology stocks, with every member of the Magnificent Seven trading down. Long-term government bond yields and the performance of defensive stocks are expected to remain focal points for investors in the coming weeks.
