U.S. equity markets sold off Monday as a dramatic escalation in Middle East tensions — with Iran launching missiles at the UAE and the U.S. Navy sinking Iranian boats near the Strait of Hormuz — sent crude oil surging more than 5% and reignited fears of a stagflationary spiral. The Dow Jones Industrial Average fell 557.37 points, or 1.13%, to close at 48,941.90. The S&P 500 declined 0.41% to 7,200.75, retreating from the record 7,232 set last Thursday. The Nasdaq Composite lost 0.19% to 25,067.80.
The selloff was concentrated in rate-sensitive and consumer-discretionary sectors, while energy stocks surged. The Energy Select Sector SPDR (XLE) gained 3.8%, led by Exxon Mobil (XOM) +4.2%, ConocoPhillips (COP) +5.1%, and Diamondback Energy (FANG) +6.4%. Conversely, the Consumer Discretionary ETF (XLY) fell 1.8%, airlines cratered with United Airlines (UAL) -4.6% and Delta (DAL) -3.8%, and homebuilders declined with the iShares U.S. Home Construction ETF (ITB) losing 2.4%.
Bond Market Stress
The 30-year Treasury yield cleared 5.0% for the first time since October 2023, settling at 5.04% as the oil-driven inflation shock repriced the long end of the curve. The 10-year yield rose to 4.456% — the highest since July 2025 — up 10 basis points on the day. The 2-year yield climbed 7 basis points to 3.94%. Markets swiftly repriced Fed rate-cut expectations, with the June FOMC meeting probability of a cut falling to 18% from 34% pre-escalation, according to CME FedWatch.
Recession Risk Resurfaces
CNBC reported that markets may be 'sleepwalking into a recession' amid the Iran war oil price shock, with the effective closure of the Strait of Hormuz threatening to compound the inflation pressures that the Fed has struggled to fully contain. Average 30-year mortgage rates jumped back above 6.52% — their highest in over a month — adding pressure to the already-cooling housing market. The CNN Fear & Greed Index fell to 38 (Fear) from 52 (Neutral) last Friday.