S&P500: Stock Market Pullback Signals Risk-Off Mood Amid Middle East Crisis

Stock Futures Drop as Geopolitical Tensions Threaten Rally

Stock futures retreated Tuesday morning as intensifying Middle East tensions rattled investor sentiment and raised questions about the sustainability of the recent market rebound. Dow futures fell 191 points (-0.5%), while the S&P 500 and Nasdaq each slipped between 0.5% and 0.6% ahead of the opening bell. The decline comes after a three-week advance that had lifted the S&P 500 back above 6,000 for the first time since February.

What Triggered the Risk-Off Sentiment?

The primary driver of the selloff was President Trump’s unexpected exit from the G7 summit in Canada. In a dramatic turn, Trump urged Americans to “immediately evacuate Tehran” via a Truth Social post, fueling fears of imminent escalation.

Although French President Macron hinted at ceasefire discussions, Trump dismissed those claims, stating his departure involved “much bigger” issues. Strategists remain uncertain about the intent or implications behind his comments, leaving markets in a holding pattern.

Historical analysis from LPL Financial suggests that while geopolitical shocks typically induce swift declines, the average drawdown from such events has been limited to 4.6% over roughly 19 days. Nonetheless, the uniqueness of each crisis often leads to unpredictable outcomes.

Which Sectors Are Gaining Ground?

Defense stocks emerged as early winners. Investors rushed into military contractors on expectations of increased government spending and potential contract acceleration. Lockheed Martin and Northrop Grumman rose about 1% in pre-market trading, while L3 Harris Technologies and RTX posted modest gains. These moves reflect growing demand for military systems as geopolitical risk intensifies.

Energy names also surged on oil price gains. West Texas Intermediate climbed 1.5% and Brent crude advanced 1.7% as supply disruption fears gripped commodity markets.

Chevron, ConocoPhillips, and EOG Resources all showed bullish momentum in recent sessions, benefitting from the sector’s renewed tailwind.

How Will This Complicate the Fed’s Plans?

The geopolitical developments add complexity to the Federal Reserve’s outlook. With interest rates held steady at 4.25%-4.5% since December, Chair Powell had indicated no urgency to cut, citing economic resilience. But the oil spike could reignite inflation concerns, potentially delaying policy easing. Current market pricing suggests the first rate cut may not arrive until July, with just two cuts expected in 2025.

Are There Any Bright Spots in Corporate News?

Amid the geopolitical turmoil, several corporate updates provided support. OpenAI secured a $200 million defense contract, boosting its role in national security applications. Amazon extended Prime Day to a four-day event (July 8–11), aiming to bolster Q3 consumer spending. Additionally, the Trump Organization announced a branded $499 gold smartphone and a $47.45/month mobile plan, underscoring continued monetization of the Trump brand.

What Should Traders Watch Next?

Technical analysis from JPMorgan suggests markets may enter a consolidation phase. With S&P 500 support seen near the 6,000 mark, early-summer weakness could present tactical buying opportunities. However, risk for a deeper pullback may grow in late August.

For now, investors should monitor defensive sectors, oil-linked names, and volatility plays such as gold and the VIX. The immediate outlook hinges on developments in the Middle East, with any diplomatic breakthrough potentially reversing current weakness. With a key Fed meeting and earnings season ahead, the next few weeks will test whether markets can absorb geopolitical shocks without unraveling recent gains.

More Information in our Economic Calendar.