Major U.S. stock indices experienced a significant pullback on Friday. Concerns over inflation, fueled by conflict in the Middle East, drove U.S. Treasury yields higher, threatening to interrupt the AI-driven rally that had recently propelled the indices to record highs.
The yield on the benchmark U.S. 10-year Treasury note reached 4.58%, its highest level since May 2025. A synchronized surge in global bond yields followed. With increasing signs that the war in Iran is weighing on the economy, investors are adjusting their expectations for a faster pace of interest rate increases and weaker economic growth.
According to the CME FedWatch Tool, the probability of a 25 basis point rate hike by the Federal Reserve in December has doubled over the past week to approximately 40%. This shift followed stronger-than-expected inflation data, suggesting price pressures may be more persistent.
"Investors are repricing for structurally higher oil prices and embedding a more enduring inflationary backdrop," said Tom Ross, Head of High Yield at Janus Henderson Investors. "Another, less discussed but increasingly understood factor is the impact of artificial intelligence... The short-term effect of massive data center buildouts is itself inflationary."
Statements from U.S. President Trump and Iran's foreign minister dampened expectations for a swift end to the conflict in the Middle East, now in its third month. Brent crude futures rose over 3%, trading at $109.59 per barrel.
This sell-off on Friday sharply reversed gains from the prior session. On Thursday, Wall Street had closed at fresh record highs as investors largely shrugged off inflation concerns, continuing to push stocks higher on sustained enthusiasm for artificial intelligence. For the week, the Dow Jones Industrial Average was on track for a loss, while the S&P 500 and Nasdaq Composite were poised for only marginal gains.
The software sector bucked the broader market trend, rising 2%. This sector has generally underperformed during this year's artificial intelligence rally.
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