Stocks Slip, Oil Jumps as Iran War Rattles Markets

Key Takeaways

• US stocks fell Tuesday but finished the day up from their worst levels as the escalating Iran war threatened a prolonged uplift in energy prices.
• Crude oil rose for the second straight day as shipments through the Strait of Hormuz remain choked off.
• Analysts warn of a possible inflationary shock if the conflict draws out, which would widen the market segments affected by the turmoil.

US stocks fell Tuesday as the war in the Middle East continued to escalate, while oil and gas prices surged. The Morningstar US Market Index fell just over 1% Tuesday, having been down nearly 3% in early trading. The S&P 500 lost 0.94% and the Nasdaq dropped 1.02%.

US Treasury yields were little changed on the day, with the benchmark 10-year Treasury yield edging up to 4.07%.

Meanwhile, the VIX volatility index briefly spiked to a 10-month high as rising geopolitical tensions rattled investor sentiment.

Describing Monday’s muted market action, Edelman Financial Engines chief investment strategist Katie Klingensmith says, “There’s an increasing indifference [among investors] to a lot of political noise.” In contrast, “Today feels like a very different kind of recognition of the seriousness of the fallout.”

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Focus On Rising Oil Prices

The focus in the markets is on energy prices, as the war has essentially shut down shipping traffic through the critical Strait of Hormuz. Crude oil climbed toward $77 on Tuesday before falling back toward $74, up roughly 5% on the day, bringing the rise since the onset of the war north of 10%.

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“The market has effectively priced in a wider-scale conflict, but with further escalation or a prolonged conflict, expect markets to fall further,” says Morningstar chief European markets strategist Michael Field. “Markets certainly won’t be rallying while this conflict is ongoing.”

European markets have been hit especially hard, owing to the continent’s heavy dependence on Middle Eastern oil and gas. Gas prices jumped a day after Qatar shut off production at its Ras Laffan facility amid Iranian attacks.

“Oil supply disruption should continue into next quarter and European gas prices will be pushed up due to the need to replenish storage,” says Riccardo Marcelli Fabiani, senior economist at Oxford Economics.

The Morningstar Europe Index fell roughly 3.0% at Tuesday’s close, deepening its slump this week to 4.4%, putting the index on track for its worst weekly loss since the week ended April 4, 2025, when a slew of US tariff measures drove an 8.0% selloff in European stocks.

“Oil prices and inflation are directly linked,” says Joanna Stocks, senior investment manager at Mattioli Woods. “Any prolonged disruption has a risk of pushing oil towards $100 a barrel, which if it persists would have a meaningful impact on global inflation.”

A spike in inflation could in turn compel central banks to slow their rate-cutting cycles or even raise rates, further hitting equity and bond markets. Traders have already trimmed the odds of near-term rate cuts at several key central banks since the war broke out.

Sara Silano, Sunniva Kolostyak, and Francesco Lavecchia contributed to this story.