Markets Slump on War and Inflation Fears
Wall Street stumbled Friday, with the Dow falling 1.1% and the S&P 500 shedding 0.4%. The sell-off was driven by a combination of geopolitical anxiety following the U.S. strikes on Iran and a hotter-than-expected inflation report. Meanwhile, UBS downgraded U.S. equities, warning of “asymmetric structural downside risks.”
The recent U.S. and Israeli military strikes on Iran, dubbed "Operation Epic Fury," followed weeks of failed negotiations over Tehran's nuclear program. U.S. President Donald Trump stated the objective is to eliminate threats from the Iranian regime and has encouraged the Iranian people to "take over your government." Iran has retaliated with missile strikes on U.S. bases in the region and on Israel. Fears of a wider conflict are rattling energy markets, as Iran is a major oil producer and the Strait of Hormuz is a critical transit route for about 20% of the world's petroleum supply. Analysts warn that a prolonged conflict could disrupt a significant portion of global oil supply, potentially pushing Brent crude prices towards $100 a barrel. Brent crude had already reached its highest level since July 2025 before the full-scale escalation. The January Producer Price Index (PPI) report showed a 0.5% increase, surpassing economists' expectations of 0.3% and marking the largest monthly gain since September 2025. On a yearly basis, wholesale prices rose 2.9%. This uptick in inflation was largely driven by a 0.8% jump in the cost of services, the biggest monthly increase since mid-2025. The core PPI, which excludes volatile food and energy prices, also surged by 0.8% in January. Adding to market jitters, UBS downgraded U.S. stocks to a "Neutral" rating, citing a combination of factors that have historically signaled underperformance. The bank is concerned about lofty valuations, with U.S. equities trading at a significant premium compared to global peers. The "asymmetric structural downside risks" mentioned by UBS refer primarily to the potential for a significant weakening of the U.S. dollar. The bank also noted that the positive impact of corporate stock buybacks, a long-time driver of the U.S. market, is diminishing as buyback yields are now on par with global counterparts.
