Major stock indexes tumbled sharply, with the Dow closing nearly 800 points lower, after being down as much as 1,100 points in afternoon trading. The S&P 500 and Nasdaq Composite also dropped, despite some earlier optimism about the AI trade after Broadcom reported robust first-quarter revenue growth. Investors are increasingly concerned about the ongoing US-Iran conflict and its potential to drive oil prices higher and cause inflation to become unanchored, similar to the 1970s.
The escalating conflict in the Middle East is raising fears among investors about energy supplies, higher inflation, and slower economic growth. This has led to a surge in oil prices and a corresponding rise in bond yields. Economists are now factoring the Iran war into existing concerns about elevated inflation and tepid fourth-quarter GDP growth, increasing worries about a stagflationary episode.
Higher inflation could derail the market's expectations for Federal Reserve rate cuts, which investors had been banking on to sustain the bull market. Analysts suggest that the more crude oil prices rise, the greater the headwind for equities. While economic fundamentals are currently taking a backseat to geopolitical events, a strong US jobs report would allow Fed officials to breathe easier, while signs of cracks in the labor market would complicate their navigation of the energy supply shock and flat yield curve, potentially signaling stagflation.
