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U.S. stocks closed lower on Tuesday amid heightened geopolitical tensions.
Defense and energy shares gained as oil prices rose following the escalation.
Dow fell 0.4%, S&P 500 dropped 0.9%, and Nasdaq was down 1.5%.
Federal Reserve rate cuts and upcoming economic data are in focus.
U.S. stock indexes ended the day in negative territory after Iran fired missiles at Israel. This escalation led to increased caution among investors, pushing the Nasdaq down 1.53%, while the Dow Jones Industrial Average and S&P 500 fell 0.41% and 0.93%, respectively.
Amid this broader decline, energy stocks saw gains as U.S. oil prices increased 2.4%, supported by shares of Exxon Mobil which climbed 2.3%. Defense stocks also rallied, with Northrop Grumman rising 3% and Lockheed Martin up 3.6%. The S&P 500 aerospace and defense index hit a record high. Conversely, airline stocks such as Delta Air Lines fell 1.6%.
Iran’s missile attack on Israel was seen as retaliation for Israel’s actions against Tehran's Hezbollah allies. Following this, U.S. President Joe Biden directed the U.S. military to assist in defending Israel.
The news led to increased market caution, with CBOE's market volatility index (VIX), known as Wall Street's fear gauge, rising. Market analysts, like Peter Tuz, president of Chase Investment Counsel, suggested that if tensions escalate further, it could trigger continued market weakness due to uncertainty.
Economic reports released earlier showed U.S. job openings rebounded in August, while the Institute for Supply Management (ISM) reported a decline in manufacturing activity to 47.2 in September, slightly below the expected 47.5.
Investors remained cautious ahead of U.S. jobless claims data expected on Thursday and the monthly payrolls report on Friday. According to the CME FedWatch Tool, traders now see a 38% chance that the Federal Reserve will lower interest rates by 50 basis points in November, compared to 35% the previous day.
The port strike on the East Coast and the Gulf Coast further added to economic concerns, halting about half of the nation's ocean shipping. While this strike is not expected to be as disruptive as the one during the COVID-19 pandemic, it still introduces additional uncertainty for the Fed.
Declining issues outnumbered advancing ones on the NYSE by a 1.32-to-1 ratio, and by 2.36-to-1 on Nasdaq.
The S&P 500 recorded 51 new 52-week highs and two new lows.
The Nasdaq Composite registered 75 new highs and 137 new lows.
Trading volume on U.S. exchanges stood at 13.16 billion shares, above the 11.98 billion average for the last 20 trading days.
The escalation between Iran and Israel has increased risk aversion among investors, with the broader markets ending lower. While energy and defense stocks benefited from the heightened tensions, the overall market remained cautious. As the Federal Reserve's policy decisions and upcoming economic data unfold, the market’s trajectory will be shaped by both geopolitical events and economic fundamentals.