Iran strikes lift oil, rate hike odds rise

Stocks fell across the board on Tuesday as oil surged and bond yields climbed. The S&P 500 closed down 0.71% at about 7,633, the Dow Jones Industrial Average lost 419 points or 0.79% to about 52,767, and the Nasdaq Composite dropped 271 points or 1.03% to about 26,100. Brent crude rose 4.6% to $94.65 a barrel and West Texas Intermediate crude gained 5.2% to $90.22, its highest close in more than a month.

The day started with military escalation. American forces struck an island in the Strait of Hormuz, the narrow sea channel that a large share of the world's seaborne oil has to pass through, and Iran responded with attacks on the United Arab Emirates and Jordan. It was the first exchange of strikes between the two in about a month, and it wiped out the market's growing assumption that shipping traffic through the channel was returning to normal.

From there the chain runs through inflation. Oil is an input cost in almost everything, because fuel is what moves goods and powers factories, so when crude jumps, traders assume the prices of other things will follow. Higher expected inflation makes it more likely the Federal Reserve, the US central bank that sets short term interest rates, will raise rates to cool things down, and Fed Chair Kevin Warsh has said he is committed to fighting inflation. Money markets, which are where traders effectively bet on where interest rates are headed, moved to price a September rate increase as more likely than not.

That is what hit stocks. When investors expect higher interest rates, safe government bonds start paying more, so investors demand a better deal to hold riskier things like shares. The 10-year Treasury yield rose to 4.79%, its highest since January 2025, and the 30-year sat around 5.27%. Higher rates hurt fast growing technology companies most, because much of their value rests on profits expected years from now, and a higher interest rate makes those distant profits worth less in today's money. That is why the Nasdaq fell further than the Dow. The pressure was not only American, either. Government bond yields were rising worldwide, with Japan's 10-year yield briefly touching 3% for the first time in three decades.

Individual names moved on their own news. Axon Enterprise fell about 9%, and the cybersecurity companies Palo Alto Networks and CrowdStrike dropped 5.24% and 6.90% after reporting earnings. Moderna jumped about 10% on analyst upgrades following news of a cancer vaccine candidate. Apple rose 2.61% as Tim Cook moved from chief executive to executive chair and John Ternus took the top job.