Weekly Investment Perspective

U.S. equities extended their recent weakness last week, with all three major indices posting a fourth consecutive weekly decline amid heightened geopolitical tensions and renewed inflation concerns. The S&P 500 declined approximately 1.9%, the Nasdaq Composite fell 2.1%, and the Dow Jones Industrial Average dropped 2.1% for the week. The primary driver continues to be the war in Iran and the growing threat to energy infrastructure, which pushed crude oil prices sharply higher during the week, with Brent briefly exceeding $112 per barrel while WTI approached $100. Rising energy prices have reintroduced inflation concerns at a time when markets were increasingly focused on potential Federal Reserve easing later in 2026, while the backup in Treasury yields added another layer of pressure for equities.

Equity markets reacted negatively to both the geopolitical backdrop and the resulting rate volatility. The 10-year U.S. Treasury yield climbed toward 4.40%, reflecting a repricing of inflation risk and a more cautious outlook on monetary policy. While energy stocks and financials held up relatively well, the weakest areas of the market were actually more defensive groups such as utilities, materials, and consumer staples, highlighting how broad the pressure became as investors contended with both geopolitical risk and a more challenging rate backdrop.

The tone has improved to start the new week, though the situation remains highly fluid. Over the weekend, President Trump said on Truth Social that the U.S. and Iran had held several days of “constructive” talks and that discussions would continue this week, while also indicating he would postpone planned strikes on Iranian power and infrastructure for several days. Iranian media pushed back on that characterization and denied that direct or indirect talks had taken place, framing Trump’s comments as an effort to cool oil prices and buy time. Even so, markets appear to be taking some comfort in the possibility that both sides may still be looking for an off-ramp, however messy or uncertain that process may be. That has helped support a more constructive tone in early trading this week, with oil pulling back from overnight highs, equity markets rebounding higher, and bond yields also easing from their recent peaks.

Last week’s Federal Reserve meeting added another layer to the story. The Fed held the federal funds rate unchanged, consistent with market expectations, and policymakers maintained a data-dependent stance while acknowledging that risks remain. Importantly, the Fed will often try to look through an oil price shock if it believes the inflationary impulse will be offset by weaker growth. Higher gasoline and energy costs show up in inflation data, but they also act like a tax on consumers by crowding out spending elsewhere in the economy. In that sense, an oil shock can resemble a form of monetary tightening: it squeezes household purchasing power, dampens discretionary demand, and can ultimately restrain broader price pressure outside of energy. That dynamic will be especially important if oil prices remain elevated for more than a brief period.

The macro environment remains mixed. While some recent economic data has shown signs of softening, inflation pressures, particularly via energy, complicate the path forward for both the economy and the Fed. Investors are increasingly focused on whether higher energy costs will feed through to broader inflation measures and delay rate cuts, or whether the bigger effect will be a squeeze on the consumer and slower growth. The interplay between inflation expectations, energy prices, and policy outlook will remain central to market direction.

The coming week features a lighter economic calendar, so the Iran war and the path of oil prices will likely remain the primary focus. Beyond the geopolitical headlines, investor attention will also turn to consumer-related data for clues on how households are faring amid rising inflation pressure and broader uncertainty. In the near term, sentiment can shift quickly on any hint of de-escalation, but markets will also want reassurance that the consumer remains resilient enough to keep an energy shock from turning into a more meaningful slowdown.

2026 The Long View | First Merchants Bank