Wall Street pulled back from record highs on Monday as escalating tensions in the Middle East threatened a fragile ceasefire in the war with Iran. The S&P 500 fell 0.4% from its recent peak, while the Dow Jones Industrial Average dropped 557 points, or 1.1%, following reports of new attacks in the region. Brent crude jumped 5.8% to $114.44 per barrel after the United Arab Emirates reported its first direct attack by Iran since early April.
Energy supply risks
The latest flare-up centers on the Strait of Hormuz, where a double blockade by the U.S. and Iran has crippled global oil flows for three weeks. Prices surged after President Trump announced the U.S. military would begin guiding merchant ships through the waterway. While the military confirmed two American-flagged ships successfully transited on Monday, the operation involved sinking six small boats to establish a security area, fueling investor fears of a broader conflict.
The fallout. High energy prices are already hitting the broader economy, with the 10-year Treasury yield rising to 4.43% as inflation persists above 3%. Businesses are beginning to feel the strain:
- Norwegian Cruise Line Holdings shares fell 8.6% as fuel costs rose and bookings for European travel softened.
- UPS and FedEx dropped 10.5% and 9.1% respectively, weighed down by shipping costs and new logistics competition from Amazon.
- Tyson Foods gained 8% after raising beef prices 11.5% to offset slowing volume and protect profit margins.
Earnings provide a floor
Despite the geopolitical volatility, investors have remained resilient due to record corporate profits. The S&P 500 is still up 29% over the past year, supported by high profit margins and dominant earnings from tech giants. Alphabet and Nvidia are both on track to generate more than $120 billion in profit this year, helping the market look past consumer pessimism and rising gas prices.
The current setup is putting pressure on global logistics and discretionary spending. If the blockade and high energy costs persist through the summer, analysts warn that the current $4 billion a month being drained from American consumer pockets will begin to erode the corporate earnings growth that has kept stocks at record levels.
