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U.S. stock index futures dropped sharply on Friday after escalating tensions in the Middle East, triggered by Israel’s military strike on Iran. The attack raised fears of broader regional instability and sent shockwaves through global markets, weakening risk sentiment.
Israel’s large-scale strikes on Iran’s nuclear facilities were aimed at preventing Tehran from developing an atomic weapon. In retaliation, Iran launched 100 drones, promising a harsh response, which further exacerbated the geopolitical risk. The conflict in the Middle East, a major oil-producing region, led to a surge in oil prices by more than 6%, providing a boost to U.S. energy stocks. Companies like Chevron (NYSE: CVX) and Exxon (NYSE: XOM) rose nearly 3% in premarket trading.
Market Reaction
At 04:32 a.m. ET, Dow E-minis were down 505 points, or 1.17%, S&P 500 E-minis were off by 70.5 points, or 1.17%, and Nasdaq 100 E-minis dropped 309.25 points, or 1.41%. The Russell futures fell by 1.6%, signaling sharp declines in domestically focused stocks.
Airline stocks took a hit as the surge in crude oil prices raised concerns about rising fuel costs. Delta Air Lines (NYSE: DAL) was down 3.9%, United Airlines dropped 4.8%, Southwest Airlines (NYSE: LUV) lost 2.5%, and American Airlines (NASDAQ: AAL) declined 3.9%.
Defense Stocks Benefit from Geopolitical Tensions
On the other hand, defense stocks surged, benefiting from the heightened geopolitical risk. Lockheed Martin (NYSE: LMT) gained 4.7%, RTX Corporation rose 5.5%, Northrop Grumman (NYSE: NOC) climbed 4.2%, and L3 Harris Technologies saw an increase of 4.3%.
S&P 500 and Nasdaq Remain Below Record Highs
Despite the sharp pullback, the S&P 500 remains just 1.8% below its record high reached earlier this year, fueled by strong monthly gains in May, supported by upbeat corporate earnings and a softening in President Trump’s trade stance. Meanwhile, the tech-heavy Nasdaq is approximately 2.8% off its record closing high from December last year.
Focus Shifts to Federal Reserve Meeting
Investors are now looking ahead to the Federal Reserve’s meeting scheduled for next week. Policymakers are widely expected to keep interest rates unchanged, but the market will be watching closely for any signals regarding future rate moves, especially given the current economic and geopolitical uncertainties.
The escalating tensions between Israel and Iran have introduced significant volatility in the markets, with a broad risk-off sentiment taking hold. Oil prices surged, while defense stocks gained, reflecting the changing landscape in global geopolitics. Investors are also focusing on the upcoming Federal Reserve meeting, where expectations of a stable interest rate policy are likely to keep markets in a holding pattern as they await further developments.
