Saqib Iqbal Ahmed
3 min read
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By Saqib Iqbal Ahmed
NEW YORK (Reuters) -Investors will focus on the Israel-Iran conflict and U.S. economic data releases next week to assess the near-term outlook for stocks, as the S&P 500 hovers just below its February highs.
The S&P 500 has rebounded sharply from its early-April selloff, as tariff-related tensions have eased. However, the U.S. benchmark index appears to be taking a breather at some 2.7% below its February closing high. The index has gone 27 trading sessions since coming within 5% of its February high but has not yet set a new record.
With Israel and Iran trading missiles, escalating threats of a sweeping conflict in the Middle East sent oil prices sharply higher and led to caution in markets.
"We’re all waiting on pins and needles to see what happens with the Israel-Iran situation," said Brian Jacobsen, chief economist at Annex Wealth Management.
So far, the oil market has absorbed most of the impact from geopolitical turmoil, with equities relatively stable. Yet stock investors remain concerned that higher oil prices could stoke inflation and upset plans for interest rate cuts from the Federal Reserve.
On Wednesday, the Fed held rates steady and policymakers signaled borrowing costs are still likely to fall this year. But they estimated the overall pace of expected future rate cuts would be slower than they saw at their March meeting. They cited expectations that higher inflation would flow from President Donald Trump's tariff plans.
"The question is oil prices and what that does to inflation – which has implications for monetary policy and how long the Fed keeps rates "meaningfully restrictive"," said Sonu Varghese, global macro strategist at Carson Group.
The big near-term risk for equities, investors said, was if the U.S. were to join Israel's bombing campaign against arch-enemy Iran. Trump is keeping the world guessing whether the U.S. would join Israel's bombardment of Iranian nuclear and missile sites, as residents of Iran's capital Tehran streamed out of the city on the sixth day of the air assault.
The White House said on Thursday that Trump would decide on U.S. action in the next two weeks.
"If we were to see the U.S. enter the war or further escalation in the attacks between the two countries, that would give the S&P 500 and equity markets more reasons to react negatively," said Damian McIntyre, head of multi-asset solutions at Federated Hermes in Pittsburgh.
On the other hand, a de-escalation in Middle East tensions could prompt a relief rally for stocks.
