Military tensions between the U.S. and Iran intensified over the weekend as the U.S. completed its 10th consecutive night of strikes against Iran following a Houthi maritime embargo declaration against Saudi Arabia. The conflict has claimed a third service member’s life, raising concerns about a more prolonged and severe phase of hostilities. President Trump pledged retaliation through social media.
Despite the escalation, equity markets showed resilience, with the S&P 500 declining only marginally during Monday’s session and remaining approximately 2% below its all-time high established in June. The index has recovered substantially from its late March closing low of 6,343.72, buoyed primarily by strong corporate earnings momentum during the second-quarter reporting season and recent softer-than-expected inflation data. Market participants have largely maintained their assumption that both the U.S. and Iran prefer to avoid outright war, given the mutual economic risks.
However, rising energy prices present a significant concern. Brent crude briefly exceeded $90 per barrel on Monday and hovered near that threshold on Tuesday, while the U.S. 10-year Treasury yield traded above 4.6%, a level closely monitored by traders. If these elevated levels persist through year-end, analysts warn that earnings estimates may require downward revision. Some strategists suggest the S&P 500 could experience a correction in worst-case scenarios, though the technology sector, representing 38% of the index’s weighting, remains relatively insulated from higher energy costs compared to the energy sector’s 3% allocation.
Consumer purchasing power faces headwinds from elevated fuel costs. Gasoline prices reached $4 per gallon for the first time in more than a month as of Monday. Economists estimate the average American household has absorbed approximately $1,100 in losses from the conflict through increased energy and military expenses. The personal savings rate declined to 3% in May from approximately 5% a year earlier, suggesting consumers are drawing down reserves to maintain spending. Analysts caution this pattern typically accompanies recessionary conditions. Meanwhile, futures markets are pricing in an 83% probability that the Federal Reserve will maintain interest rates steady at its next meeting.
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