As Oil Prices Decline, Stocks Stage a Cautious Bounce

U.S. equity futures seesawed on Monday as investors remained uncertain about whether Iran would retaliate immediately to U.S. airstrikes on its nuclear sites—and what effect any response might have on oil exports from the Middle East. The tension has added a new layer of complexity to global markets, even as crude oil prices pulled back from their earlier surge.

‍

Futures tied to the S&P 500 slipped by 0.1% after shifting between slight gains and losses throughout the session, reflecting investor caution. Meanwhile, Brent crude, which had jumped as much as 5.7% earlier in the day, eased to a gain of just 1.2%, trading below $78 a barrel.

‍

The U.S. dollar gained strength, climbing 0.5% against a basket of major global currencies. It appreciated against all members of the Group of Ten as traders sought protection against the possibility of renewed oil price inflation.

‍

The energy sector remained a key area of focus for investors. Since the beginning of the latest Israel-Iran conflict, oil prices have already risen over 12%. Now, concerns are mounting that tensions could escalate further, particularly if Iran moves to interfere with oil shipments through the Strait of Hormuz—a narrow, strategically critical passageway that handles about 20% of the world’s crude oil flows.

‍

While Iranian Foreign Minister Abbas Araghchi suggested that Tehran is keeping all options open for its response, there have so far been no indications of actual disruptions in oil traffic. That has allowed some market participants to hope for a more restrained path forward.

‍

“Markets appear to be evaluating that Iran’s response might not be as severe as feared,” said John Bilton, head of multi-asset strategy at JPMorgan Asset Management, in an interview with Bloomberg Television. “Iran likely wants to avoid drawing in additional global powers, and investors are treating this as a geopolitical event that doesn’t fundamentally alter the long-term economic or market outlook.”

‍

Indeed, despite geopolitical tensions, the reaction from equities has remained subdued. Following a two-week decline, the S&P 500 is still only about 3% below its record high from February, suggesting that many investors are not panicking and may even be looking past current headlines.

‍

Part of the calm could be attributed to preemptive moves by fund managers. According to analysts, many institutional investors had already reduced their equity exposure in anticipation of possible conflict escalation. That means the market was less vulnerable to a sudden drop, and with valuations no longer stretched, selling pressure may be limited.

‍

Mohit Kumar, chief European economist at Jefferies International, said the measured reaction gives investors an opportunity to further trim exposure and rebalance their portfolios without needing to rush. “We don’t expect a full closure of the Strait of Hormuz,” Kumar noted, “but we do see the potential for short-term disruptions. Our base case is a few weeks of uncertainty without a sharp spike in tensions.”

‍

Still, the risk of wider market impacts remains. Global bond markets declined as well, with Europe leading the way amid concerns that an extended conflict could reignite inflation. German 10-year bond yields climbed as much as five basis points to 2.56%, their highest level in a week. U.S. Treasury yields also inched higher, with the 10-year rate rising two basis points to 4.40%.

‍

Should Iran attempt to restrict access to the Strait of Hormuz, the consequences for the global economy could be severe. Such a move would likely trigger a sharp rise in oil prices, heightening inflation and simultaneously slowing economic growth—a combination often referred to as “stagflation.”

‍

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said that outcome poses a major dilemma for central banks. “A stagflation scenario, where growth stalls and inflation rises due to elevated oil prices, is the most significant risk in this situation,” he explained. “It would limit central banks' ability to provide support, whether through rate cuts or stimulus, which could leave markets more exposed.”

‍

In the meantime, traders continue to monitor both geopolitical and economic signals for signs of what may come next. With crude prices stabilizing for now and no clear evidence of physical supply disruptions, investors are proceeding cautiously—but the atmosphere remains fragile.

‍

Any sudden shifts in the Middle East conflict could quickly change the market narrative. Until then, most investors appear to be taking a wait-and-see approach, carefully managing risk while keeping a close eye on energy prices, central bank policy, and geopolitical headlines.

‍