U.S. stock index futures pointed to a sharply lower open on Monday, suggesting equities could extend losses after two consecutive sessions of declines.
Market sentiment weakened following joint U.S. and Israeli military strikes on Iran over the weekend that resulted in the death of Iranian Supreme Leader Ayatollah Ali Khamenei.
Tensions escalated further after Israel carried out additional airstrikes targeting Hezbollah positions in Beirut and other areas of Lebanon in response to projectile attacks launched from Lebanese territory into northern Israel.
President Donald Trump indicated the confrontation with Iran could continue for up to four weeks, heightening fears that the conflict could broaden significantly across the region.
The geopolitical escalation has driven crude oil prices sharply higher, reinforcing investor concerns about renewed inflation pressures.
“Scenes in the Middle East have caused widespread nervousness across financial markets,” said Dan Coatsworth, head of markets at AJ Bell. “The U.S. attacks on Iran have caused oil prices to soar amid fears of disruptions to supplies, pushing up costs for businesses and consumers.”
He added, “If the issues persist then the market will start to worry about new inflationary pressures and that could lower expectations for near-term interest rate cuts.”
Stocks had already moved notably lower on Friday, extending Thursday’s pullback, with technology shares leading declines and the Nasdaq continuing its sharp slide.
Although the major indices recovered somewhat from intraday lows, they still finished firmly in negative territory. The Dow Jones Industrial Average fell 521.28 points, or 1.1%, to 48,977.92, the Nasdaq Composite dropped 210.17 points, or 0.9%, to 22,688.21, and the S&P 500 declined 29.98 points, or 0.4%, to 6,878.88.
For the week overall, the Dow lost 1.3%, the Nasdaq fell 1.0%, and the S&P 500 slipped 0.4%.
Additional pressure on markets followed fresh economic data showing U.S. producer prices rose more than expected in January. The Labor Department reported that its producer price index for final demand increased 0.5% during the month after a downwardly revised 0.4% gain in December.
Economists had forecast a 0.3% rise compared with the previously reported 0.5% increase for the prior month.
On an annual basis, producer price growth slowed slightly to 2.9% in January from 3.0% in December, while economists had anticipated a moderation to 2.8%.
“For the past month the market has been worried about AI disruption and its impact on the labor market, so inflation hasn’t been top of mind,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
He continued, “But this morning’s inflation readings could give the Fed another reason to be more patient with rate cuts and wait until the second half of the year before making any changes.”
The stronger-than-expected monthly inflation data, combined with concerns about artificial intelligence-related job losses, has fueled worries about a potential stagflationary environment.
Adding to fears surrounding AI-driven disruption, Block (XYZ) announced plans to reduce its workforce by nearly half.
Block Chief Financial Officer Amrita Ahuja said the company sees an “opportunity to move faster with smaller, highly talented teams using AI to automate more work.”
Airline stocks were among the hardest hit, sending the NYSE Arca Airline Index down 5.0% and to its lowest closing level in nearly a month.
Financial shares also faced heavy selling pressure, with the KBW Bank Index and the NYSE Arca Broker/Dealer Index falling 4.9% and 3.0%, respectively.
Software and semiconductor stocks recorded notable losses as well, while pharmaceutical, retail and telecommunications sectors moved higher during the session.