U.S. stocks concluded last week with significant losses, as escalating tensions involving Iran and the resulting surge in global oil prices cast a shadow over the world economy. No sector was spared, with much of the gains achieved since 2026 being erased. The S&P 500 fell 1.3% on Friday, pushing the index into negative territory for the year, down 1.5% year-to-date. The Dow Jones Industrial Average dropped approximately 1.0%, or about 450 points, on Friday, bringing its year-to-date decline to 1.2%. The technology-heavy Nasdaq Composite declined 1.6% on Friday and has fallen roughly 3.7% since January 1.
Looking ahead to the coming week, the central questions for investors remain the same as last week, but anxiety has intensified: how long will this situation persist? As noted by Daan Struyven, Head of Oil Research at Goldman Sachs, the impact of war is non-linear. Each additional day the energy shock persists amplifies its adverse effect on markets. Concurrently, the suspension of redemptions by several large private credit funds, combined with a monthly employment report that fell far short of expectations, has deepened pessimism regarding the fundamentals of the U.S. economy.
This week's focus will center on Wednesday's Consumer Price Index and Friday's Personal Consumption Expenditures Price Index, which will reflect price conditions as the oil price surge begins to signal potential inflationary pressures. Following the disappointing February employment report, investors will also closely monitor Friday's Job Openings and Labor Turnover Survey. This data, along with figures from the University of Michigan's survey, will provide a broad reading of consumer sentiment.
On the corporate front, earnings from Oracle (ORCL.US) on Tuesday will be a key event, offering the market another opportunity to assess the state of the artificial intelligence trade after Nvidia's strong results failed to satisfy investors. Adobe (ADBE.US), Hewlett Packard Enterprise (HPE.US), Dollar General (DG.US), and Dick's Sporting Goods (DKS.US) are also scheduled to provide quarterly updates this week.
The only real story in the market last week was the situation involving Iran and the upward pressure it exerted on oil prices, which have reached multi-year highs. As the conflict entered its second week, U.S. crude futures recorded their largest weekly percentage gain since at least 1985 on Friday, surging over 36% and trading above $91 per barrel. The international benchmark Brent crude futures also rose sharply, highlighting why the Strait of Hormuz—a critical maritime chokepoint for global oil trade—is considered a strategic "throat." According to Vortexa, under normal circumstances, about one-fifth of the world's seaborne oil supply transits through the Strait of Hormuz.
With shipping disruptions, approximately 16 million barrels of oil are facing delays. With limited outlets and storage capacity reaching its limits, producers have begun cutting output. The result is a significant shortage of oil supply in the market. Analysts note that countries like China have begun stockpiling supplies. Traders have consequently pushed up prices for near-term oil futures. Energy analysts suggest that if oil flows do not resume, prices will only continue to climb.
Vikas Dwivedi, Global Energy Strategist at Macquarie, stated, "Without an agreement and a rapid halt to all military actions, the crude market could begin to break down within days, not weeks or months. Based on our analysis, a closure of the Strait of Hormuz for several weeks would trigger a cascade of effects that could push crude prices to $150 or higher."
The impact of oil on inflation is "very real." Oil is a "primary input" for the economy—it is integral to everything from plastics and petrochemicals to fertilizers and factory operations. When oil prices rise, the cost of nearly all other goods tends to follow. Mary Daly, President of the Federal Reserve Bank of San Francisco, said on Friday, "An oil price shock, depending on its duration, is a real concern."
This dynamic presents a nightmare scenario for the Federal Reserve, whose process of pausing interest rate hikes in its fight against post-pandemic inflation has been disrupted. The yield on the 10-year U.S. Treasury note has climbed back above 4.14%, and market expectations for interest rate cuts diminished this week as traders digested the risk that rising crude prices could slow progress toward the Fed's 2% inflation target.
For policymakers, the key questions are: how much inflationary pressure would sustained higher oil prices create, and how long would that pressure last? Goldman Sachs estimates that in a scenario where oil prices remain elevated for several months, headline year-over-year inflation could temporarily rebound to near 3%. Historically, the Fed has tended to look past temporary supply shocks, especially when they primarily affect headline inflation.
Regional Fed leaders, such as Neel Kashkari of Minneapolis and John Williams of New York, have indicated in their comments that it is too early to judge the long-term effects of the oil price increase. However, if energy-driven price pressures persist and begin to seep into core measures or inflation expectations, policymakers may find it harder to justify rate cuts in the near term.
If energy prices complicate the Fed's task, a dismal employment report adds another layer of difficulty. The U.S. economy lost 92,000 jobs in February, sharply missing economists' expectations for a gain of 55,000. This halted the hiring momentum seen early in the year and renewed concerns that artificial intelligence might be having a broader impact on the job market. The unemployment rate edged up to 4.4% from 4.3% in January, whereas economists had expected it to remain unchanged.
Gina Bolvin, President of Bolvin Wealth Management Group, saw the influence of AI in the employment data, noting "a divergence in the market—macro growth is slowing while technological transformation accelerates." Peter Graf of Amova Asset Management Americas expressed a similar view, writing that the report "serves as a bracing cold shower for investors who believed the U.S. economy could seamlessly reap the benefits of the AI productivity revolution without being affected by volatile shifts in government policy."
This perspective finds some support in data: in February, Jack Dorsey's Block announced layoffs of approximately 4,000 employees, representing about 40% of its workforce. On Wednesday evening, Block CFO Amrita Ahuja told Brian Sozzi that the layoffs were due to artificial intelligence.
Some economists argue the report is not as dire as it appears. They suggest that the surprising results for both January and February were influenced by external factors—for instance, according to the Bureau of Labor Statistics, a major strike at Kaiser Permanente led to a loss of 37,000 jobs in doctors' offices. Andrew Husby, an economist at BNP Paribas, suggested via email commentary that the weak February performance should be viewed together with January's surge as two volatile readings driven by "special factors."
Nevertheless, this has not stopped the spread of a view that the labor market may not be as robust as hoped by some in the White House and the Federal Reserve.
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