U.S. equity futures signaled a sharply weaker start to trading on Monday, pointing to further declines after stocks posted losses in each of the previous two sessions.
Market sentiment deteriorated following coordinated military strikes by the United States and Israel on Iran over the weekend that resulted in the death of Iranian Supreme Leader Ayatollah Ali Khamenei.
Regional tensions intensified further after Israel launched additional air attacks on Hezbollah positions in Beirut and other parts of Lebanon in response to projectiles fired into northern Israel from Lebanese territory.
President Donald Trump indicated that hostilities with Iran could continue for as long as four weeks, fueling concerns that the conflict may expand across the broader Middle East.
The escalation has pushed crude oil prices sharply higher, reviving fears that inflationary pressures could strengthen again.
“Scenes in the Middle East have caused widespread nervousness across financial markets,” said Dan Coatsworth, head of markets at AJ Bell. “The U.S. attacks on Iran have caused oil prices to soar amid fears of disruptions to supplies, pushing up costs for businesses and consumers.”
He added, “If the issues persist then the market will start to worry about new inflationary pressures and that could lower expectations for near-term interest rate cuts.”
Stocks had already declined notably on Friday, extending Thursday’s sell-off, with technology shares leading losses and the Nasdaq continuing to underperform.
Despite recovering somewhat from session lows, the major indices still closed firmly lower. The Dow Jones Industrial Average dropped 521.28 points, or 1.1%, to 48,977.92, the Nasdaq Composite fell 210.17 points, or 0.9%, to 22,688.21, and the S&P 500 slipped 29.98 points, or 0.4%, to 6,878.88.
For the week, the Dow lost 1.3%, the Nasdaq declined 1.0%, and the S&P 500 edged down 0.4%.
Additional pressure came from fresh economic data showing U.S. producer prices rose more than anticipated in January. The Labor Department reported that its producer price index for final demand increased by 0.5% following a downwardly revised 0.4% gain in December.
Economists had forecast a 0.3% increase compared with the earlier estimate of a 0.5% rise for the prior month.
On a yearly basis, producer price growth slowed slightly to 2.9% in January from 3.0% in December, while economists had expected a decline to 2.8%.
“For the past month the market has been worried about AI disruption and its impact on the labor market, so inflation hasn’t been top of mind,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
He continued, “But this morning’s inflation readings could give the Fed another reason to be more patient with rate cuts and wait until the second half of the year before making any changes.”
The stronger-than-expected inflation data, combined with concerns over AI-related job losses, has raised fears that the economy could face stagflationary conditions.
Adding to worries about technological disruption, Block (XYZ) announced plans to cut nearly half of its workforce.
Block Chief Financial Officer Amrita Ahuja said the company sees an “opportunity to move faster with smaller, highly talented teams using AI to automate more work.”
Airline stocks were among the worst performers, sending the NYSE Arca Airline Index down 5.0% to its lowest closing level in nearly a month.
Financial stocks also came under heavy pressure, with the KBW Bank Index and the NYSE Arca Broker/Dealer Index falling 4.9% and 3.0%, respectively.
Software and semiconductor shares also declined noticeably, while pharmaceutical, retail and telecommunications stocks posted gains during the session.
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