Key Points
Brent crude has broken through the $100 per barrel mark again, while US stock markets fell broadly on Thursday.
The US conducted airstrikes on Iran for 12 consecutive nights, coupled with an attack on an oil tanker near Saudi waters, leading to a sharp rise in oil prices.
Previously, oil price increases and higher US Treasury yields had a muted impact on US stocks, but on Thursday, investors began to revise their previously short-sighted optimistic expectations.
The escalating conflict in the Middle East, with signs of becoming a long-term affair, prompted investors to fully price in the associated negative effects, causing major US stock indexes to fall sharply on Thursday.
The US has now conducted airstrikes on Iran for 12 consecutive nights, pushing both oil prices and US Treasury yields higher. Initially, US stocks had largely shrugged off the escalating US-Iran conflict, with major indexes trading in a sideways range during the oil price surge.
However, the situation took a decisive turn following news of an attack on an oil tanker in Saudi waters: Brent crude futures surged past $100 per barrel, the 10-year US Treasury yield broke above 4.7%, reaching its highest level since January 2025. The S&P 500 index recorded its largest single-day drop in a month.
"The risks have become too large to ignore," said Steve Sosnick, chief strategist at Interactive Brokers, interpreting the current stock market sell-off. "A $100 oil price is unavoidable; a 10-year yield above 4.7% cannot be overlooked; and the 30-year yield firmly above 5% means the stock market can no longer turn a blind eye."
US West Texas Intermediate (WTI) crude surged 6%, closing at $92 per barrel. This represents a cumulative gain of over 28% from a low of less than $70 earlier this month. Since the US began its consecutive nightly airstrikes on July 12, the S&P 500 index has fallen by approximately 2%.
At the start of the US-Iran war in March this year, oil prices skyrocketed nearly 70%, fueling widespread market concerns about stagflation: rising energy costs would push inflation higher again, while high oil prices increase consumer driving costs and dampen spending intentions. At that time, the S&P 500 experienced a maximum drawdown of over 7.5%.
Subsequent signals of de-escalation from both the US and Iran led the market to refocus on the artificial intelligence theme. Despite the intermittent conflict, US stocks staged a strong rebound in April and May.
Core Market Logic: Betting on Trump Seeking a Diplomatic Exit
The market's primary source of confidence previously was investors' firm belief that Trump would seek a diplomatic exit to end the war, unwilling to bear the economic and political costs of a prolonged conflict.
In a research note earlier this month, JPMorgan equity strategists wrote: "Since late March, we have consistently advised buying on dips in stocks caused by US-Iran conflict, as a diplomatic exit is highly probable, and an agreement between the two sides is ultimately achievable. Corrections triggered by negative geopolitical news remain buying opportunities, although the risk of repeated flare-ups in the conflict persists."
Latest Institutional Views
Samir Samena, a global senior strategist at Wells Fargo Investment Institute, believes traders need to refocus on the inflation and economic concerns from March.
She noted that high oil prices simultaneously fuel inflation and dampen consumer spending, with both risks warranting attention. With renewed tensions, investors should prepare for a deeper correction in US stocks.
Sosnick added that the stock market is also pricing in a tightening of the corporate financing environment. According to the CME FedWatch tool, the probability of a Fed rate hike at next week's meeting has risen to nearly 38%, while the probability for a September hike has surged past 80%. Just one week ago, these probabilities were only 12% and 53%, respectively.
When the conflict first erupted in March, many analysts were surprised by the stock market's muted reaction, reasoning that the US economy was more resilient and better able to withstand an energy shock. Michael Tenny, CEO of investment firm Pereon Wealth, still maintains this logic.
"The short-term oil price spike is more about headline heat and has a limited tangible impact on client portfolios," Tenny said. "However, if oil prices stabilize above $120, a tipping point will be reached, and the full cascading economic effects will materialize."
This information is for reference only and does not constitute investment advice.
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