Stocks experienced a significant drop on Monday following the U.S. and Israel’s military action against Iran over the weekend, which has spurred concerns about escalating tensions in the Middle East and a subsequent surge in oil prices. The Dow Jones Industrial Average fell by 543 points, marking a decline of 1.1%. The S&P 500 also dropped by 1.1%, while the Nasdaq Composite futures saw a more considerable decline of 1.6%.
In the wake of the attacks, gold futures spiked by 2%, as investors sought refuge in the traditional safe-haven asset. Moreover, the CBOE Volatility Index, often referred to as Wall Street’s fear gauge, surged to its highest level in 2026, reflecting a heightened sense of uncertainty among investors.
The military strikes resulted in the death of Iran’s Supreme Leader Ayatollah Ali Khamenei, which is seen as a significant turning point for the Islamic Republic since the revolution in 1979. Iranian officials have promised substantial retaliation, escalating fears of a broader regional conflict, especially as reports of explosions emerged from places like Dubai and Abu Dhabi following the strikes.
Despite assurances from President Donald Trump that U.S. military operations are “ahead of schedule,” investor sentiment remains cautious, with many concerned about the potential for an extended conflict. Barclays’ Ajay Rajadhyaksha acknowledged the increased risk of prolonged military engagement but suggested that it might not drastically alter the U.S. economic outlook.
The oil market reacted strongly to these developments, with U.S. crude prices rising by 7%. There are growing worries that the conflict could disrupt oil supplies, particularly through the Strait of Hormuz, a critical conduit for global crude transport. Disruptions in this area could have ripple effects throughout energy markets and reignite inflation concerns on a global scale.
Adam Hetts, the global head of multi-asset at Janus Henderson, noted that the current geopolitical uncertainty significantly impacts investor sentiment, which could further depress risk assets worldwide. Should oil prices continue to rise due to prolonged uncertainty, this could initiate a global inflationary scare.
In contrast to the broader market trend, defense stocks saw gains, with Northrop Grumman rising by 3%, Lockheed Martin and RTX up by 4%, and energy stocks like Exxon Mobil and Chevron increasing by 3% and 1%, respectively. However, the overall risk-off mentality saw most sectors decline, particularly in technology and banking. Companies such as Broadcom, Amazon, and Alphabet faced losses, as did financial institutions Morgan Stanley and Goldman Sachs.
The escalating geopolitical situation adds to an already fragile climate for equities, which had seen a sell-off on Friday, ending February on a down note amidst renewed uncertainties in artificial intelligence and software sectors. Concerns about potential automation impacts on business models and resulting job losses have further pressured market sentiment.
Citi equity strategists noted the likelihood of a short-term impact from the conflict but did not rule out the possibility of prolonged volatility. As concerns about the Middle East situation are layered on top of existing worries related to AI spending and its potential to disrupt established business practices, investor caution is expected to persist.