Stock market, economy sectors to watch

A ramp-up in fighting between the U.S. and Iran over the weekend has left Wall Street reconsidering its expectations for the war’s economic impact.

The U.S. completed its 10th straight night of strikes against Iran on Monday, after the Houthis in Yemen declared a maritime embargo against Saudi Arabia. This comes after a third service member died amid recent fighting that could mean the war is entering a longer-term and deadlier era. President Donald Trump vowed the U.S. would retaliate, saying in a Truth Social post “they will pay.”

Investors appear to keep brushing off the latest flareup in tensions, with the S&P 500 only falling marginally in Monday’s session after a losing week. It also remains just 2% below its all-time high set in June. Still, economists are worried that energy prices once again ascending could weigh on consumers and the broader economy.

‘It’s about duration’

As far as the stock market goes, the war in the Middle East has had little impact. Since sagging to a closing low of 6,343.72 in late March, the S&P 500 has bounced to all-time highs. That’s in large part due to the assumption that neither the U.S. nor Iran will want a return to outright war — an undesirable outcome, as both stand to lose if the global economy tips into a recession. 

Investors have instead shifted their focus to fundamentals, given that the strength of corporate earnings has picked up speed since the start of the second-quarter reporting season. Last week’s softer-than-expected inflation data also added to investor optimism.

But investors can’t ignore the recent spike in oil prices, nor the rise in bond yields, for long. Brent crude briefly topped $90 a barrel on Monday and hovered just below that level on Tuesday. The U.S. 10-year Treasury yield traded above 4.6% on Monday— a key level watched by traders. It remained near that mark on Tuesday.

If crude and the 10-year Treasury yield continue to rise — or stay elevated for longer than investors were hoping for — Wall Street might have to start pricing in changes to inflation expectations and monetary policy that will eventually hit a company’s bottom line. 

“It’s about duration,” said Art Hogan, chief market strategist at B. Riley Wealth. “If we’re above $85 or $90 into the end of the year, I suspect that the earnings estimates for this year would have to be trimmed.” 

Hogan said the S&P 500 could fall into a correction in a worst-case scenario. But he also specified that the broader index will be helped in part by tech — its largest sector which is also relatively insulated from higher energy prices. Tech has a 38% weighting in the S&P 500, while energy accounts for just 3%, according to S&P Global.

Financials and healthcare are other two sectors that could continue to benefit from secular tailwinds,…