US stocks diverged sharply as a spike in oil prices after the collapse of the US-Iran deal sent energy shares higher while dragging down the broader market.
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Nasdaq rebounds from 1% drop as oil surge reshapes US stocks
The Nasdaq Composite erased a 1% intraday decline to trade near flat, while the Dow Jones Industrial Average fell 1.1% as oil surged after President Trump declared the US-Iran agreement "over."
"The market is pricing in a supply shock scenario that we haven't seen since the initial Iran tensions last year," said Lori Calvasina, head of US equity strategy at RBC Capital Markets. "Energy is the obvious beneficiary, but the broader index is grappling with what this means for inflation and the Fed path."
The S&P 500 dropped 0.3%, with the energy sector surging more than 4% as West Texas Intermediate crude climbed above $73 a barrel and Brent crude held near $78. Technology stocks led the recovery in the Nasdaq after an initial selloff, while financial and industrial names weighed on the Dow. The Cboe Volatility Index rose to around 18, reflecting elevated uncertainty as traders weighed the geopolitical risks.
The divergence between the tech-heavy Nasdaq and the cyclically oriented Dow points to a rotation as investors reassess the inflation outlook. Traders increased bets on a Federal Reserve rate hike as soon as October, according to CME data, ahead of the release of minutes from the central bank's June meeting later Wednesday.
The escalation followed US military strikes on Iranian positions late Tuesday in response to attacks on three commercial vessels in the Strait of Hormuz. Trump, speaking in Ankara ahead of a NATO summit, said the US had revoked a license allowing Iran to export oil globally, effectively ending the ceasefire agreement. He added that the US would "probably hit them hard again tonight," though he later said he did not expect a full-scale war to restart.
The energy sector's 4% gain made it the top performer in the S&P 500 by a wide margin, as investors priced in the risk of prolonged supply disruptions from the Persian Gulf region. The rally in crude lifted shares of Exxon Mobil Corp. and Chevron Corp. by more than 3% each.
On the downside, rate-sensitive sectors lagged as the 10-year US Treasury yield edged higher on the prospect of tighter monetary policy. The US dollar strengthened against major peers, adding pressure on multinational companies with overseas revenue exposure.
The market's attention now turns to the Fed minutes, due at 2 p.m. Washington time, for clues on how Chairman Kevin Warsh and his colleagues view the inflation trajectory after the latest geopolitical shock.
This article is for informational purposes only and does not constitute investment advice.
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