Stocks finished lower today, with the Dow down 0.70%, S&P 500 off 0.33%, Nasdaq down 0.12%, and Russell 2000 falling 0.54%.
The decline was relatively broad, although technology held up better than most sectors. Semiconductors and software finished mostly higher, while energy stocks benefited from rising oil prices. Banks, airlines, homebuilders, healthcare and utilities were among the weaker areas.
Treasury yields edged higher, particularly at the long end, while WTI crude jumped 2.8%. Gold and silver declined, the dollar weakened slightly, and Bitcoin gained nearly 2%.
Middle East Tensions Push Oil Higher
The main new source of uncertainty came from the Middle East.
Over the weekend, the U.S. struck Iranian launchers on Larak Island that officials said were being prepared to deploy sea mines in the Strait of Hormuz. Iran subsequently launched missiles toward a U.S. base in Jordan, although they were intercepted.
The exchange marked the first direct U.S.-Iran military confrontation in roughly a month and raised concerns that the recent improvement in shipping through the Strait of Hormuz could reverse.
Oil consequently moved sharply higher. That matters beyond energy markets because higher oil prices can feed directly into inflation exactly when investors are already reassessing the likelihood of additional Fed rate hikes.
The Fed Remains a Bigger Issue for Markets
Interest rates continue to loom over the market following Fed Chair Kevin Warsh’s Jackson Hole speech on Friday.
Markets are now pricing roughly 38 basis points of additional rate hikes through year-end, the most in more than a month. Warsh’s message that inflation remains concerning has forced investors to rethink expectations that the Fed was close to finishing its tightening cycle.
Treasury Secretary Scott Bessent said today that Treasury and the Fed remain aligned on the bond market, while also arguing that policymakers historically have not tightened monetary policy simply in response to temporary policy shocks.
That distinction could become increasingly important if geopolitical tensions continue pushing energy prices higher.
Technology Holds Up Better
Technology was one of the few relative bright spots today.
Semiconductor, memory and software stocks generally held up despite the broader decline. The AI investment cycle also remained active, with reports that OpenAI’s advertising business has reached an annualized revenue run rate of roughly $1 billion and SK Hynix is considering using Intel’s foundry business for part of its next-generation memory production.
Amazon was a notable exception, falling after reports that the FTC plans to sue the company over allegations involving advertising practices.
Elsewhere, dealmaking remained active, including Aon’s planned $17 billion acquisition of USI Insurance Services and several transactions across energy and healthcare.
A Big Week for the Economy
Today’s economic calendar was quiet, although the Dallas Fed manufacturing index came in considerably stronger than expected.
The bigger tests arrive later this week. Tomorrow brings ISM manufacturing and JOLTS job openings, followed by private payroll data and the Fed’s Beige Book Wednesday. Thursday includes jobless claims and ISM services. Then Friday brings the August employment report, with economists expecting roughly 55,000 new jobs after July’s 23,000 decline. With the Fed increasingly focused on inflation, investors will be watching closely for evidence that the labor market is either stabilizing or weakening further.
Here’s Our Take
Today’s decline was relatively modest, but the combination of higher oil prices and higher rate expectations is worth watching. The market had begun receiving some relief from improving energy flows through the Strait of Hormuz, but renewed military exchanges between the U.S. and Iran remind investors how quickly that situation can change. If oil continues rising, it could complicate the inflation outlook just as the Fed is sounding more concerned about price pressures.
At the same time, the underlying market remains more resilient than the headline decline suggests. Technology held up relatively well, AI investment remains strong and corporate activity continues. The bigger question is increasingly macroeconomic rather than corporate: Can inflation continue cooling enough to keep the Fed from tightening much further?
That makes Friday’s employment report especially important. A softer labor market could reduce the urgency for additional hikes. Stronger-than-expected jobs data, combined with higher oil prices, would make the Fed’s path considerably more difficult and could become a bigger headwind for stocks as September gets underway.
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