Global stock markets faced renewed pressure last week as the ongoing Middle East conflict continued to impact the world's energy economy. U.S. equities closed lower, pushing the three major indices into negative territory for the year. The Dow Jones Industrial Average fell approximately 1.0% on Friday, while the S&P 500 dropped 1.5%, bringing their year-to-date losses to over 5% each. The tech-heavy Nasdaq Composite declined 2% on Friday, accumulating a loss of about 7% so far this year.
The bond market also experienced selling pressure as traders began pricing in the possibility of the Federal Reserve raising interest rates later this year, driven by concerns that surging oil prices could trigger a new wave of inflation. Following a third consecutive week of declines, U.S. Treasury yields climbed to multi-month highs. The two-year yield increased by 18 basis points to 3.90%, while the benchmark 10-year yield jumped 13 basis points to 4.38%, its highest level since late July of last year.
With the Middle East conflict entering its fourth week and showing no signs of abating, global markets remain under strain. On Saturday, the U.S. President issued a 48-hour ultimatum to Iran, demanding the reopening of the Strait of Hormuz or facing potential strikes on its power plants. Iran responded by warning that any such attack would lead to an indefinite closure of the vital waterway and retaliatory strikes on U.S. and Israeli energy infrastructure in the region, signaling a high risk of escalation from both sides. Concurrently, the U.S. administration has reportedly initiated preliminary "peace talks" with Iran through third-party intermediaries. U.S. officials estimate the conflict could persist for another two to three weeks, although the President's advisory team is simultaneously pursuing diplomatic avenues to end the hostilities. Any potential agreement would need to include the reopening of the Strait of Hormuz, provisions for handling Iran's highly enriched uranium, and long-term arrangements addressing Iran's nuclear program, ballistic missile projects, and support for regional proxies.
In a week with a relatively light economic data calendar, market focus is likely to center on any indicators related to inflation and labor market conditions, especially after the Fed Chair struck a more hawkish tone following last Wednesday's interest rate decision. Key data points this week include the University of Michigan's short- and long-term inflation expectations and consumer sentiment figures due on Friday. Investors will also monitor industrial economic conditions via S&P Global data on Tuesday and the Kansas City Fed's manufacturing report on Friday. On the corporate earnings front, reports from Jefferies on Wednesday and Carnival Corporation on Friday will be highlights in an otherwise quiet earnings period.
Oil prices have remained firmly above $100 per barrel as the conflict enters its fourth week, dashing earlier hopes on Wall Street and among the public that the disruption—and the near-total halt of shipping through the Strait of Hormuz—would be measured in days rather than weeks or months. At the time of writing, Brent crude was up 0.29% at $106.72 per barrel. Prices experienced a brief dip on Thursday after the Israeli Prime Minister stated at a press conference that Israel would assist the U.S. in reopening the Strait, with both leaders also announcing that their militaries would remove energy infrastructure from target lists. However, prices soon recovered to previous levels. The CEO of QatarEnergy noted last Wednesday that repairs from an attack on its massive Ras Laffan LNG terminal could take years. On Friday, the U.S. President commented, "We can talk, but I don't want a ceasefire."
Due to the escalating conflict, shipping through the Strait of Hormuz is largely at a standstill, with over 150 tankers and cargo ships forced to anchor outside the waterway. JPMorgan Chase has warned that the strait's closure represents not a transient inflationary shock but a structural disruption capable of stalling the global economy. Deutsche Bank's scenario analysis suggests that if the blockade leads to substantial damage to energy infrastructure, a surge in oil prices towards $200 per barrel could move from theoretical possibility to reality. The head of Commodity and Derivatives Research at BofA Securities also cautioned that a blockade lasting several months would inevitably push the global economy into a deep recession, with Brent and WTI crude prices likely soaring above $200 per barrel.
In a recent client note, the head of Sankey Research succinctly summarized the situation: "You break it, you buy it," adding that the immediate fear is a stark choice: "either Iran controls the Strait of Hormuz, or the U.S. does." Similarly, Bridgewater Associates founder Ray Dalio stated that the conflict will culminate in a decisive confrontation over the Strait, the outcome of which will affect far more than oil prices—it will determine the viability of the U.S.-led global order. Dalio wrote that "everything depends on who controls the Strait of Hormuz," arguing that if Iran retains the ability to control or even negotiate access, the U.S. will be perceived as having lost the war regardless of the conflict's resolution.
On March 19, France, the UK, Germany, Italy, the Netherlands, and Japan issued a joint statement announcing their readiness to take appropriate measures to ensure navigation safety in the Strait of Hormuz. Canada subsequently joined the statement, and South Korea's foreign ministry announced its decision to join the seven-nation declaration on March 20. Both the U.S. and Iran are intensely focused on the Strait. Reports indicate the U.S. is deploying additional troops to the Middle East, with objectives centered on the waterway. Three U.S. warships, including the USS Boxer, and approximately 2,500 Marines have departed San Diego for the region. The Pentagon has also redirected the USS Tripoli from Japan, carrying the 31st Marine Expeditionary Unit. This deployment is said to provide the President with more military options, including operations to "reopen" the Strait, which would involve air and naval forces near Iran's coastline. The administration is also reportedly considering deploying ground forces to Iran's oil export "lifeline," Kharg Island, aiming to capture it as leverage to force Iran to restore transit through the Strait. In response to potential U.S. action against Kharg Island, an Iranian military source warned that any "military aggression" would be met with an "unprecedented retaliation" surpassing previous responses to U.S.-Israeli attacks.
The Federal Reserve held interest rates steady last week, a decision largely anticipated by markets. However, the Fed's cautious policy tone is prompting a reassessment of the timeline for potential rate cuts. In remarks to reporters, the Fed Chair acknowledged that the oil crisis triggered by the Middle East conflict could elevate inflation. Rising energy prices not only impact headline inflation but could also, if sustained, push up so-called "core inflation" through increases in goods and services prices. This has forced the Fed to reconsider a path that was previously seen as gradually shifting towards rate cuts—a prospect now being reframed as an extended pause, or even a potential return to rate hikes if price pressures reaccelerate. Regarding the next policy meeting, the Chair stated that data released over the coming six weeks will be "very important for assessing economic performance and changes in the outlook," but for now, "all we can really do is watch and wait." Data shows bond traders now assign a 50% probability to a Fed rate hike by October, a stark reversal from pre-conflict expectations and in contrast to the Fed's latest "dot plot," which projected one rate cut this year and another in 2027.
Meanwhile, the AI investment theme is entering a phase where results must deliver. Last Tuesday, NVIDIA's CEO announced at the annual GTC conference that the company's Grace Blackwell and Vera Rubin chips alone are projected to generate $1 trillion in revenue. However, this news was insufficient to stem selling in the tech sector. NVIDIA shares fell approximately 4.1% for the week, while the broader technology sector declined 1.4% over five sessions, bringing its year-to-date loss to over 20%. Micron Technology's announcement of plans to increase its fiscal 2026 capital expenditure by $5 billion also failed to impress investors. A technology analyst at Jefferies noted that this marks the second instance—the first being NVIDIA—where impressive performance data was treated by the market as a "sell-the-news" event. In other words, even strong figures are increasingly struggling to justify the elevated valuations of leading tech companies. According to a credit analyst at Bank of America, AI has officially entered a "show-me phase," where "the positive impacts of AI are increasingly being offset by its negative effects." The analyst suggested that from a corporate fundamentals perspective, the market may be at an AI-driven inflection point.
