(Updated with additional information.)

On Tuesday, key U.S. stock indexes fell while oil prices surged due to concerns over heightened conflicts in the Middle East.

The Israel Defense Forces (IDF) reported that Iran had launched missiles aimed at Israel. This development followed a warning from a U.S. official stating that Iran was on the brink of launching a ballistic missile strike against Israel. The U.S. is actively assisting Israel in its defense preparations and has cautioned that any direct assault on Israel would result in “severe consequences for Iran.”

The potential for a more extensive conflict in the Middle East is raising fears about oil supply disruptions, resulting in a 3.59% increase in WTI crude prices by 4:25 p.m. ET, experts indicated. Iran contributes to about 4% of the global oil supply.

This uncertainty also led to short-term selling in U.S. stock markets and an uptick in investments in safer assets, such as gold and U.S. Treasuries. The S&P 500 index concluded down 0.93% at 5,708.75, while the Dow dropped 173.18 points, or 0.41%, to finish at 42,156.97. The Nasdaq composite saw a 1.53% decrease, closing at 17,910.36. Gold prices rose by 0.77% as of 4:23 p.m. ET, and the yield on 10-year Treasuries decreased slightly. Treasury yields tend to move inversely to Treasury prices.

Despite the developments, analysts observed that market reactions were relatively calm, suggesting investors are waiting for more clarity regarding overseas events before making significant changes to their investment strategies.

“The situation is dynamic until the attack occurs and until any potential retaliatory actions are taken,” stated Mike O’Rourke, chief market strategist at JonesTrading. “It’s too early to predict how this may affect financial markets in the coming days…the drop in the S&P 500 appears modest compared to the geopolitical risks involved.”

Key Factors for Investors to Monitor in the Middle East

Analysts suggest paying close attention to the extent of Iran’s attack and any consequential damage, especially to civilian areas, as Iran aims to avoid drawing the U.S. more directly into the conflict.

“Looking back, we saw minimal impact when Iran previously announced and executed military operations,” remarked David Belle, founder and trader at Fink Money, noting that Iran’s strike on Israel last April resulted in only limited damage thanks to interception efforts from Israel, the U.S., the UK, and other allies.

Should tensions rise and hinder Iran’s oil supply, Reilly indicated that Saudi Arabia’s response—whether it increases production to stabilize global oil supply—will be critical. An intervention by Saudi Arabia could help keep oil prices from spiking.

If oil prices do climb, Reilly explained that significant increases would be necessary to impact inflation meaningfully. “Typically, a 5% rise in oil prices translates to about a 0.1 percentage point increase in overall inflation,” he noted. “A much larger and sustained price hike would be needed for it to affect central bank policies.”

Concerns About Strikes at East and Gulf Coast Ports

Currently, investors have largely downplayed worries regarding strikes at East and Gulf coast ports that commenced on Tuesday.

Economists predict that as long as the strike is brief, the impacts on economic growth and inflation should be minor.

“While the strike affects around 40% of U.S. container traffic, occurring at a challenging time ahead of the holiday shopping season and elections, it shouldn’t significantly drive up inflation in comparison to past port shutdowns in 2021-2022 immediately following the pandemic,” said Raymond James’ Chief Economist Eugenio Aleman via email. “This is largely due to declining consumer demand. Sluggish job growth, more selective consumer spending, and a predicted decrease in housing costs should mitigate inflationary pressures.”

What Are Investors Focusing On Now?

According to O’Rourke, investors are primarily concentrating on the potential for additional Federal Reserve interest rate cuts.

“Overall, investors have responded positively to the Federal Reserve’s aggressive easing strategy,” he mentioned. They appear “willing to overlook uncertainties surrounding both the upcoming elections and the port strike for now.”

In September, the Fed reduced its benchmark short-term interest rate for the first time in four years, aiming to support a cooling labor market as inflation starts to decline. It lowered the rate by half a percentage point to between 4.75% and 5.00%, down from a 23-year high of 5.25% to 5.5%.

The Fed has also indicated its plans to continue reducing rates throughout this year, extending to 2026.