Geopolitical Tensions Drive US Stock Market Decline Amid Rising Inflation Expectations

The US stock market declined on Tuesday, led by falling indices in the Dow Jones Industrial Average and S&P 500. The Dow dropped to a one-week low due to escalating geopolitical tensions.

WTI crude oil prices surged more than 2% after the US and Iran exchanged strikes for the first time in about a month. This increase boosted inflation expectations, driving up bond yields. The 10-year T-note yield jumped to its highest level in 19 months at 4.76%.

Friday's hawkish comments from Fed Chair Warsh also contributed to the market volatility. He stated that he would bring inflation back to target and said financial conditions aren't restrictive, bolstering the chance of a Fed rate hike next month. The probability of a 25-basis-point interest rate increase at the upcoming FOMC meeting on September 15-16 is now 65%.

Earnings results have been generally positive, with Q2 earnings growth tracking for almost 32%, significantly higher than expected projections of +23%. AI spending is driving this growth, with infrastructure stocks contributing nearly 60% to the S&P 500's earnings-per-share increase in Q2. So far, 86% of the reported companies have exceeded estimates.

Overseas markets are mixed, with China's Shanghai Composite closing up +0.85%, while Japan's Nikkei-225 Stock Average declined -0.14%. European government bond yields rose as well, with the 10-year German bund yield reaching a 15-year high at 3.324%.