MW Israel's attack on Iran shattered stocks' early-summer calm. Here's what investors should watch out for next.
By Joseph Adinolfi
Keep an eye out for signs of labor-market weakness, as well as the risk that rising oil prices could put more upward pressure on inflation
An eerie calm had descended over the U.S. stock market. But Israel's attack on Iran - and a subsequent Iranian counterattack - was enough to shake things up on Friday.
U.S. stocks tumbled following reports that an Israeli attack on Iran had killed senior military officials and nuclear scientists, while damaging a uranium-enrichment facility.
An attempt at a recovery was ultimately stymied by news of Iranian retaliation against Israel. The S&P 500 SPX finished Friday 1.1% lower at 5,976.97, near its lowest levels of the session. It was the index's biggest daily percentage decline since May 21, Dow Jones Market Data showed.
Some said they were surprised that the latest escalation between the two bitter regional rivals didn't provoke a bigger selloff in stocks.
"I would say that the market response is fairly muted, in the sense that we were way overdue for a pullback for any reason," said Jay Hatfield, a portfolio manager at Infrastructure Capital.
Others agreed.
"The equity markets have been a bit insulated from the impact of what we've seen so far," said Brian Mulberry, a portfolio manager at Zacks Investment Management, during a call with MarketWatch.
Realized volatility touches lowest level since December
In April, stocks experienced their most rapid selloff since the COVID-19 pandemic after President Trump unveiled his "liberation day" tariffs.
But as the market recovered, wild swings gave way to incremental daily moves. The sudden shift in the market's mood quickly became evident as a yawning gap opened up between 3-month and 10-day realized volatility for the S&P 500. Ten-day realized volatility had touched its lowest level since December earlier this week.
"It's definitely impressive and surprising to see how quickly [S&P 500] realized volatility has faded," said Rocky Fishman, founder of Asym 500.
What to watch out for
Some argued that Friday's selloff wasn't more pronounced because investors had seen Israel's attack coming.
President Trump's comments earlier this week that the U.S. would evacuate some personnel from the Middle East was one signpost that a strike was being planned, Mulberry said.
"For something to really derail stocks, it needs to be a genuine surprise. Israel-Iran doesn't really fit that description," said Nicholas Colas, co-founder of DataTrek, in response to a question from MarketWatch shared via email.
But as the summer begins, other developments could upend stocks.
For example, investors appear to have largely shrugged off risks from President Trump's trade agenda.
But as the July 9 deadline for Trump's 90-day tariff pause approaches, they could start to get jittery again, especially if no new deals with major U.S. trading partners are announced, Mulberry said.
President Trump's budget bill stalling out in Congress would be another risk out of Washington.
Republicans need to raise the debt ceiling before the "X date," believed to be in late August or September. Beyond that, if Trump's first-term tax cuts for corporations aren't extended, the expected hit to corporate profits could translate into lower valuations for stocks, Mulberry said.
And inflation could start to creep higher once again if further escalation between Israel and Iran leads to a sustained rise in oil prices. That, in turn, might inspire the Federal Reserve to put off plans for its next interest-rate cut, as lower interest rates tend to help boost stocks.
The big concern right now is that Tehran could possibly retaliate by targeting shipping through the Strait of Hormuz, a key chokepoint for the global oil trade. U.S.-traded crude prices (CL00) (CL.1) rose by more than 7% on Friday, their biggest one-day percentage-point gain since 2022, according to Dow Jones Market Data.
See: The Israeli-Iranian conflict hitting the Strait of Hormuz is renewing worries about oil prices and inflation. Here's why.
Survey data released Friday showed Americans were starting to become more upbeat on the prospects for the U.S. economy for the first time in months. But any sign of a more pronounced slowdown in the labor market could help to rekindle recession fears.
While the May jobs report released on June 6 was stronger than expected, it appeared to support the notion that the pace of job creation in the U.S. had continued to slow.
Jobless-claims data released earlier this week showed the number of Americans applying for benefits had remained at its highest level since October, matching the pace from the prior week.
"While surprises are, by definition, hard to predict, the most likely one in my book is that the U.S. labor market starts to roll over. We are at a tipping point, with very low demand but still not much in the way of layoffs," Colas said.
The Dow Jones Industrial Average DJIA fell by nearly 800 points Friday, or 1.8%, to finish just shy of 42,198, according to FactSet. The Nasdaq Composite COMP fell by 1.3% to finish at 19,406.
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 14, 2025 06:30 ET (10:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
