By Vicky Ge Huang
Investors' hopes for a quick resolution to the Iran war are fading.
U.S. stocks and bonds slid on Friday after the Pentagon sent three more warships and a new deployment of marines to the region, increasing fears of a prolonged conflict that extends the largest disruption to oil supplies in history.
The S&P 500 lost 1.5%. Brent crude futures climbed for a fifth-straight week, ending Friday at $112.19 a barrel in a surge that many worry will lift consumer prices and slow economic growth.
The prospect of war-fueled inflation drove investors to tear up expectations for interest-rate cuts later this year, with futures markets showing some even betting that rates could rise as the Federal Reserve fights price pressures from surging energy costs. The yield on the 10-year Treasury note, which rises when bond prices fall, climbed to 4.39%, its highest level since July.
All three major indexes fell for a fourth-straight week, notching their worst percentage declines since April's tariff turmoil. The Dow Industrial Average finished Friday down around 1%, or around 450 points. The Nasdaq composite fell 2% and is now nearing a correction, or a decline of 10% from its recent peak. The S&P 500 is down nearly 7% from its all-time high.
"Are we likely to be in a bit of a funk for a little while? Yes, I think so," said David Miller, chief investment officer at Catalyst Funds, though he doesn't think declines are likely to be as bad as those suffered when rates climbed in 2022.
While the U.S. and its allies have intensified efforts to reopen the Strait of Hormuz, analysts warn that damage to the facilities could take months to repair and some production capacity may be lost for good. Saudi Arabia's oil officials are projecting that prices could soar past $180 a barrel if energy supply disruptions persist until late April.
That has shifted investors' expectations for interest rates worldwide. The Fed, European Central Bank and Bank of England all kept rates steady this week, while signaling they were grappling with the prospect of rising inflation.
Futures markets showed a roughly 27% chance of at least one rate hike by October on Friday afternoon, up from 6% a day earlier, according to CME Group data.
Government bonds extended their selloff on Friday. The 2-year Treasury yield, which often rises and falls with investors' expectations for short-term rates set by the Fed, jumped to 3.893% from around 3.83% Thursday.
In the U.K., 10-year yields touched above 4.95%, their highest level since 2008.
"The oil shock has dashed hopes across the developed world that persistent elevated inflation would resolve itself even with easy policy, " Unlimited Funds CEO Bob Elliott wrote to clients on Friday.
Individual investors pulled a net $3.65 billion from funds investing in junk-rated bonds in the week ended March 18, the largest weekly withdrawal since the days following President Trump's "Liberation Day," according to Morningstar Direct data.
"If we get several more weeks like that, it will start moving things." said Ali Hassan, portfolio manager at Thornburg Investment Management. "The market is underestimating the seriousness of the situation."
Write to Vicky Ge Huang at vicky.huang@wsj.com
(END) Dow Jones Newswires
March 20, 2026 16:58 ET (20:58 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
