SPDR S&P 500 ETF Trust (NYSEARCA:SPY) futures slipped as much as .74% in early trading Tuesday as Monday’s relief rally evaporated overnight. Tehran’s flat denial that any direct negotiations with Washington had taken place undercut President Trump’s claim of “very good and productive” discussions aimed at resolving hostilities, sending futures back into the red across all four major indices.
A Rally That Couldn’t Hold
Monday’s session produced the S&P’s biggest single-day gain since February 6, with the index rising 1.05% after Trump delayed strikes on Iran’s power grid. By Tuesday morning, that gain was being partially unwound. Dow, S&P 500, and Nasdaq 100 E-minis were all down roughly 0.4% in pre-market trading. Israeli officials acknowledged Trump wants a deal but said any talks were unlikely to succeed near-term, according to Reuters.
Three weeks of conflict have left real damage. The S&P 500 is down 3.89% year-to-date and has posted four consecutive weekly declines, hitting a six-month low. The Dow, proxied by SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), has fallen 6.88% over the past month.
The Nasdaq 100, tracked by Invesco QQQ Trust (NASDAQ:QQQ), is off 4.28% year-to-date, reflecting the particular pressure on growth stocks as rising yields lift the discount rate on future earnings.
Small caps, tracked by iShares Russell 2000 ETF (NYSEARCA:IWM), are essentially flat year-to-date but suffered a 6.49% drop over the past month, suggesting the selling has been broad-based rather than concentrated in large-cap tech.
Oil Is the Transmission Mechanism
The core problem for equities is oil. WTI crude surged from roughly $74 per barrel in early March to a 52-week high of $98.48 on March 13, driven almost entirely by the conflict and threats to Strait of Hormuz traffic, which handles around a fifth of the world’s crude oil and liquefied natural gas. Oil has since pulled back to $93.39, but still sits in the 98th percentile of the past year’s trading range.
Reuters noted a 20-day correlation of -0.89 between the S&P 500 and U.S. crude, meaning the two have moved in near-perfect opposition during this stretch.
High oil prices feed directly into inflation expectations, complicating the Fed’s path. The Federal Reserve struck a hawkish tone at last week’s meeting, projecting only one rate reduction in 2026. Money markets have since priced out cuts entirely. The 10-year Treasury yield climbed to 4.39%, up 0.30% over the past month and sitting in the 83rd percentile of the past year. Rising yields raise the discount rate on future earnings, which hits growth stocks hardest and explains the Nasdaq’s particular vulnerability.
Corporate News Adding to the Pressure
Macro stress is compounded by individual corporate stories. Estée Lauder (NYSE:EL) shares fell 7.72% after reports the company is in talks to acquire Spanish beauty group Puig in a cash-and-stock deal. The proposed combination of a $30-billion company buying a $10-billion target raised concerns about execution risk and balance sheet strain. Private credit markets added anxiety, with several major alternative asset managers limiting fund redemptions after withdrawal requests surged, echoing similar moves by large financial institutions earlier this month.
What the VIX Is Telling You
The CBOE Volatility Index sits at 26.8, up 36.5% from a month ago and at the 93rd percentile of the past 12 months. For context, the VIX was at 17.5 a year ago before the conflict. The current reading reflects genuine uncertainty, not panic, but options markets are demanding a meaningful premium for protection. Institutional investors are hedging rather than adding exposure.
Consumer sentiment was already fragile before the conflict. The University of Michigan’s index stood at 56.4 in January, well below the 80-point threshold that typically signals neutral economic confidence. Sustained high energy prices arriving into that backdrop create a compounding headwind for consumer spending.
Oil Prices and Fed Policy Will Drive the Next Move
The session will hinge on fresh signals from Washington or Tehran. Christopher O’Keefe of Logan Capital Management described the current environment as “whiplash,” noting that investors “wake up every morning and wonder what it’s going to be next.” Oil prices remain the clearest real-time indicator of conflict risk. A sustained pullback in oil prices toward recent support levels would likely ease pressure on equities. A push back toward the recent 52-week high would renew selling across rate-sensitive sectors. The Fed’s ability to cut rates remains frozen until the energy picture clarifies, making every Middle East development a direct input into the interest rate outlook.
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