By Martin Baccardax
A stock market that has failed to sustain a rally through two different earnings cycles, both of which topped Wall Street forecasts, resilient economic growth and some of the biggest corporate tax cuts in history is by definition on shaky ground.
A military conflict between the U.S. and Iran, which threatens around a fifth of the world's oil supply and could spillover into the wider Gulf region at any moment, has effectively turned that uneven ground into a solid bed of ice.
The S&P 500, which fell by nearly a percent over the month of February and is up just 0.5% for the year, is likely to open at the lowest levels since December on Monday as investors run for cover amid a surge in oil prices, a rally in the dollar and a big decline in risk appetite tied to an uncertain set of objectives for U.S. involvement in Iran following the Operation Epic Fury attacks.
"The stated U.S. objective has evolved well beyond nuclear containment," said ING's global head of macro Carsten Brzeski. "President Donald Trump's direct address to the Iranian people, 'take over your government', alongside Israeli Prime Minister Benjamin Netanyahu's framing of 'removing an existential threat,' makes regime change the explicit goal."
"From here, the possible military and geopolitical scenarios could fill a book and seem to change by the day," he added. "For financial markets, the branching point is simpler and more brutal: does this end in days, or does it become a forever war that involves an entire region?"
A scenario where Iran extends its retaliatory strikes, and the U.S. increases in presence in the region as it pursues either regime change or the verifiable destruction of Tehran's nuclear weapons program, could take oil prices to $100 a barrel, trigger a flight to safe-haven assets that sustains into the spring and complicate any policy response from the Federal Reserve.
Global crude prices, in fact, surged the most in four years overnight, with Brent contracts for May delivery last marked 9% higher at $79.42 a barrel.
Even holding at those levels for a month, the length of time president Trump has suggested the conflict will last, could add around 0.2 percentage points to domestic inflation readings. A move to $100 could double that impact.
"Geopolitics is rarely a clean victory," said Mark Malek, chief investment officer at Siebert Financial. "Energy markets don't care about pride. Inflation doesn't care about narratives. Actions have consequences."
"This week, investors need to think less about the first punch and more about what happens after someone says uncle -- and whether anyone actually does," he added.
Risk sentiment will also take a hit, just as investors are attempting to separate the winners and losers from the AI investment race, judge the probity of billions in capital spending on the new technology, and assess its impact on the job market and the broader economy.
Volatility gauges are already on the move, with the Cboe Group's VIX index rising 25% to a three-month high of 23.36. At that level, options traders are betting on daily swings of 1.46%, or around 100 points, for the S&P 500 over the next 30 days.
The S&P 500, meanwhile, has barely budged since late October, when Meta Platforms surprised markets with a massive increase in AI spending and "Big Short" investor Michael Burry began to warn about a bubble forming in certain corners of the tech sector.
Stronger-than-expected earnings tallies for both the third and fourth quarter, the latter of which topped Wall Street forecasts by around $34 billion, robust labor market readings and the billions in tax and accounting breaks from the One Big Beautiful Bill Act, also failed to lure back the bulls.
"Where equities go next will depend to some extent on how long hostilities last," said David Morrison, senior market analyst at London-based Trade Nation.
"But it's worth noting that, as yet, there have been no significant technical breaks to the downside," he added. "While the S&P 500 futures did drop under the 6775 low made two weeks ago, it would take a protracted break of 6730 to really shake things up."
For now, they simply remain frozen in place.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 02, 2026 08:57 ET (13:57 GMT)
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