U.S. equities ended mixed last week as investors weighed fresh signs of economic softness and heightened geopolitical tensions against a Federal Reserve that struck a cautious but steady tone. The S&P 500 dipped 0.2%, the Dow Jones Industrial Average finished unchanged, and the Nasdaq Composite eked out a modest 0.2% gain. Trading was choppy throughout the week, with volatility spiking on renewed conflict in the Middle East and continued uncertainty around the direction of interest rates. Over the weekend, tensions escalated following U.S. airstrikes on Iranian nuclear facilities, marking the most direct American military involvement in the region since the conflict intensified in April. That news, coupled with weak retail and housing data and a Fed meeting that left rates unchanged, contributed to a nervous market tone as investors search for clarity on both the macroeconomic and geopolitical fronts.

The most consequential headlines over the last week came from abroad, as the U.S. military launched a series of airstrikes targeting underground Iranian nuclear sites, including the fortified facility at Fordow. The operation was carried out in coordination with Israeli forces and followed weeks of speculation over a potential American intervention. The initial market reaction was swift, with Brent crude oil prices surging to nearly $80 per barrel before retracing gains as investors assessed the risk of further escalation and potential disruption to the Strait of Hormuz, a key chokepoint that accounts for over 20% of global energy flows. Whether Iran will actually move to close the Strait of Hormuz along its southern border — or if it even has the capability to do so — is still unclear, though a somewhat muted market reaction in this week’s early trading suggests that market participants are skeptical of a major disruption.

Domestically, economic data painted a picture of cooling activity from consumers. May retail sales came in well below expectations, declining 0.9% for the month in what was the largest drop since January. The weakness was primarily a payback from tariff frontloading that occurred over the first few months of the year. Spending on big ticket items like autos and building materials dropped sharply. Housing data added to the cautious tone, with housing starts plunging nearly 10% from the prior month and building permits also falling, indicating continued stress in the residential construction market. Mortgage rates remain elevated and affordability is still strained, weighing on both buyer demand and homebuilder sentiment. Combined with rising jobless claims and softening labor market indicators, last week’s releases paint a picture of an economy that is losing some steam after a strong start to the year.

At the center of the week’s economic developments was the Federal Reserve’s June policy meeting, where officials opted to leave interest rates unchanged at a target range of 4.25% to 4.50%. The decision was widely anticipated, but Chair Powell’s post-meeting press conference provided fresh insight into the Fed’s evolving view of the economy. Powell acknowledged that the recent string of soft data points —including retail, housing, and employment— suggests that the economy may be cooling, but stopped short of signaling an imminent rate cut. He emphasized the need to remain data-dependent and expressed concern that inflationary pressures, particularly those stemming from renewed tariffs and geopolitical instability, could prove more persistent than initially anticipated. Still, the Fed’s updated projections left room for up to two rate cuts in 2025, in line with prior guidance and market expectations. The message was one of cautious optimism: the Fed remains alert to downside risks but is not yet ready to shift into stimulus mode without further evidence that inflation is durably on track toward its 2% target.

Looking ahead, the upcoming week will feature two critical catalysts. First, investors will be closely watching the release of May’s core Personal Consumption Expenditures (PCE) index on Friday, the Fed’s preferred inflation measure. Consensus expectations call for a 2.6% year-over-year increase, a modest increase from the prior month’s 2.5% print. A softer-than-expected reading could reignite hopes for a September rate cut, while an upside surprise would likely push expectations for policy easing further out. Second, Fed Chair Powell is set to deliver his semiannual testimony before Congress beginning Wednesday, where he is expected to face tough questions from lawmakers on inflation, tariffs, and the central bank’s evolving policy stance. Markets will be parsing his comments for any signs of greater urgency—or hesitation—in moving toward a more accommodative posture.

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