U.S. stocks closed sharply lower Tuesday as escalating U.S.-Iran hostilities pushed crude prices higher, Treasury yields climbed and investors increased bets that the Federal Reserve will raise interest rates later this month.
By yourNEWS Media Newsroom
Wall Street opened September with broad losses Tuesday as renewed U.S. strikes on Iran drove oil prices higher, global bond yields climbed and investors sharply increased expectations for another Federal Reserve interest rate hike.
The S&P 500 fell 54.19 points, or 0.71%, to 7,631.95, according to preliminary data. The Nasdaq Composite dropped 271.11 points, or 1.01%, to 26,099.77, while the Dow Jones Industrial Average declined 413.41 points, or 0.78%, to 52,772.49.
The selloff followed another escalation in the U.S.-Iran conflict around the Strait of Hormuz, where Washington launched a new barrage of airstrikes against Iranian targets and Tehran threatened to prevent oil exports from leaving the Gulf.
Crude prices surged as traders weighed the possibility of prolonged disruptions through one of the world’s most important energy corridors.
Higher oil prices added to inflation concerns already weighing on financial markets and contributed to a broader rise in sovereign bond yields.
The benchmark 10-year U.S. Treasury yield continued moving higher Tuesday after reaching a 19-month high Monday, while government borrowing costs elsewhere climbed to multiyear highs.
Investors increasingly concluded that central banks may have to raise rates more aggressively to contain renewed inflationary pressure.
“Following Kevin Warsh’s hawkish comments on Friday, we have strikes in Iran and oil is higher,” Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky, said, referring to the Federal Reserve chair. “It is the perfect cocktail for a risk-off day in a market that is trading near all-time highs.”
Markets Raise Odds of September Fed Hike
Expectations for Federal Reserve policy shifted substantially during the past week.
Financial markets were pricing in a 68.2% probability that the central bank would raise its benchmark interest rate by 25 basis points at the conclusion of its September meeting, according to CME’s FedWatch tool.
That was up sharply from 39.6% one week earlier.
Warsh’s comments Friday reinforced expectations that the Fed intends to move decisively against inflation and return price growth to the central bank’s target.
The latest increase in oil prices intensified those concerns because higher energy costs can spread throughout transportation, manufacturing and consumer prices.
“We have a very, very hawkish Fed, and they absolutely want to raise rates,” Jay Hatfield, portfolio manager at InfraCap in New York, said. “They want to demonstrate their independence from the administration.”
The increase in rate expectations comes as economic indicators are showing signs of slowing activity in several areas.
The Labor Department’s latest Job Openings and Labor Turnover Survey showed reduced churn in the labor market, while Purchasing Managers’ Index data indicated weakening factory activity.
Residential construction spending is also declining.
The reports pointed to an economy confronting elevated prices, supply constraints and uncertainty stemming from tariffs and geopolitical conflict.
Iran Strikes Add New Inflation Pressure
The market’s latest move followed renewed American military action against Iran near the Strait of Hormuz.
The United States launched new airstrikes against Iranian targets after Treasury Secretary Scott Bessent said Washington would likely announce additional sanctions against an Iranian bank as part of an effort to “economically asphyxiate” Tehran’s leadership.
Iran responded by warning that it would prevent oil exports from the Gulf.
The threat immediately raised concerns about energy supplies because the Strait of Hormuz serves as a major route for global oil shipments.
Energy was the strongest performer among the S&P 500’s 11 major sectors Tuesday as higher crude prices lifted oil-related shares even while the broader market declined.
Other economically sensitive parts of the market suffered more significant losses.
The Dow Jones Transportation Average, which is often viewed as a gauge of broader economic activity, was among the day’s weakest performers.
Technology shares were also hit.
The Philadelphia SE Semiconductor Index declined, with every company in the index finishing the session lower.
September Seasonality Adds to Investor Unease
The calendar itself may also be contributing to caution on Wall Street.
September is the only month that has produced a negative average stock-market return dating back to 1926, according to Fisher Investments, citing data from Finaeon.
The historical pattern can become particularly significant during congressional election years, when political uncertainty tends to increase as campaigns enter their final stretch.
“September is the worst month historically and by a large margin. Particularly in midterm election years, this tends to be the point in the calendar where political anxiety and uncertainty start to weigh on equity markets,” Mayfield said.
Stocks entered the month trading near record levels, making markets potentially more sensitive to changes in inflation expectations, interest rates and geopolitical risk.
Tuesday brought pressure from all three simultaneously.
Renewed fighting with Iran pushed oil higher, rising energy costs increased inflation concerns and investors responded by raising expectations for a September Fed rate hike.
At the same time, Treasury yields continued climbing, increasing the relative appeal of bonds and raising borrowing costs for companies and consumers.
The combination sent all three major U.S. stock indexes decisively lower to begin the month, with technology and transportation shares among the weakest areas of the market while energy stocks benefited from the surge in crude prices.
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