US stocks close lower as Middle East tensions escalate

US stocks retreated on Wednesday, pulling back from record highs as escalating tensions in the Middle East and rising crude oil prices fueled inflation concerns and prompted investors to take profits.

Market performance

The Dow Jones Industrial Average fell 620.72 points, or 1.21%, to close at 50,687.07. The S&P 500 declined 56.06 points, or 0.74%, to 7,553.72, while the Nasdaq Composite dropped 239.92 points, or 0.89%, to 26,853.98.

All three major US indexes finished in negative territory, weighed down by losses in the financial and technology sectors. The Russell 2000 small-cap index underperformed its large-cap counterparts.

In contrast, the Philadelphia Semiconductor Index gained 1.4%, signaling continued enthusiasm surrounding artificial intelligence. However, six of the so-called “Magnificent Seven” AI-related stocks ended lower, with Meta Platforms the only gainer, rising 4.2%.

Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky, said AI stocks are trading in a world of their own, largely ignoring macroeconomic and geopolitical risks within certain limits. He added that investors continue to favor these stocks, especially on days when the broader market appears less attractive.

The software and services index fell 4% after facing pressure in recent months amid concerns about the impact of artificial intelligence on the sector.

Middle East tensions

Tensions in the Middle East intensified as the United States and Iran exchanged a new round of airstrikes, testing an already fragile ceasefire.

Oil prices rose, raising concerns that higher energy costs could evolve into a broader and more persistent inflationary wave.

Bill Northey, chief investment officer at US Bank Wealth Management in Montana, said the market remains caught between strong US economic fundamentals and concerns that a prolonged Middle East conflict could create downside risks.

He added that the key factor for inflation expectations is the duration of the Strait of Hormuz closure, noting that a prolonged disruption would reduce the likelihood of Federal Reserve rate cuts in 2026.

Financial markets are now pricing in a 41.1% probability of a Federal Reserve rate hike following the December meeting, up from just 9.1% a month ago, according to CME’s FedWatch Tool.

Meanwhile, New York Federal Reserve President John Williams reiterated that the central bank does not need to adjust interest rates despite upside inflation risks, arguing that monetary policy remains “in the right place.”

Economic data showed that the US labor market remains stable and the services sector continues to expand. However, input costs stayed elevated, while business spending plans appeared subdued amid rising energy prices and ongoing geopolitical uncertainty.

The Federal Reserve’s Beige Book also indicated that economic activity accelerated in recent weeks, while employment remained largely stable. However, the impact of higher energy prices linked to the war was described as widespread.

Among the S&P 500’s eleven major sectors, technology and financials posted the steepest declines, while energy stocks outperformed thanks to higher oil prices.

In the semiconductor sector, shares of Marvell, Intel, Qualcomm, and Sandisk gained between 3.7% and 6.7%.

Broadcom, however, fell 4.5% in after-hours trading following the release of its earnings results.

GameStop surged 6% after the original meme-stock company reported higher quarterly revenue and announced a $2 billion share repurchase program.

At the same time, sources told Reuters on Tuesday that Elon Musk’s SpaceX plans to price its initial public offering at $135 per share, aiming to raise a record $75 billion.

The S&P 500 recorded 33 new 52-week highs and 19 new lows, while the Nasdaq posted 90 new highs and 137 new lows.

Trading volume on US exchanges totaled 19.81 billion shares, compared with an average of 20.12 billion shares over the previous 20 full trading sessions.