The Dow drops 500 points as fears of renewed Middle East fighting send oil soaring

Stocks are still frothy a day after a brutal rout sent the Nasdaq 100 to its worst day since June.

Tech stocks recovered slightly after a round of frenzied selling hit the AI sector yesterday, but the pain spread to blue chip stocks on Friday as investors took in the latest surge in oil prices and new US-Iran tensions.

Traders are eyeing the potential for a prolonged conflict that will continue to put pressure the oil market, weighing on risk assets at a time when stocks are already looking fragile.

Geopolitical jitters picked up in earnest on Thursday, when a report from the New York Times said the US and Israel were planning strikes on Iran following the midterm elections. Concerns continued to build on Friday as Mohsen Rezaei, the secretary of Iran’s Supreme National Security Council, said the nation was preparing for fresh attacks in a post on X.

Brent crude, the international benchmark, jumped nearly 4% to $117 a barrel, not far from its earlier wartime peak of around $122 a barrel. West Texas Intermediate crude rose 2%, breaking back above the $100-a-barrel mark.

Oil appears to be the driver of Friday’s market losses, Sameer Samana, the head of global equities and real assets at Wells Fargo Investment Institute, said.

The Dow Jones Industrial Average briefly plunged as much as 800 points before paring its losses. The other major indexes were mixed, with the chip stocks gaining slightly after Thursday’s rout.

Here’s where US indexes stood around 12:15 p.m. ET on Friday:

The iShares Semiconductor ETF added 1%, up after shedding 6% on Thursday. The sell-off was triggered by renewed fears about AI capex, particularly after Tesla and Meta, which reported earnings Wednesday night. Investors are increasingly antsy about huge capex with little to show for it so far. There’s also the fear is that if tech giants pull back on AI spending, it could trigger a domino effect that hits the infrastructure trade.

Bond yields were edging up again after traders turned to the Treasury market for safety during the sell-off. The benchmark 10-year US Treasury yield dipped below 5% for the first time in a mont, but was moving higher again on Friday, trading around 4.98%.

Concerns have also been building over the health of the US economy, with consumer sentiment falling to a five-month low in October, according to the University of Michigan.

Sentiment has been souring due to higher interest rates and high gas prices, Sara Godfrey, an economist at Oxford Economics, wrote in a note.

The national price for a gallon of regular gas ticked up to $4.29 on Friday, still up from last year’s price by more than $1, according to AAA.

Meanwhile, the 30-year fixed mortgage rate clocked in at 7.32% last week.

“The risks are still that higher energy costs feed through to broader pressure on inflation,” Godfrey said, adding that year-ahead inflation expectations also rose to 4.7% in October, up 0.1 percentage points.

The volatility is coming ahead of a highly important week for stocks. Traders are waiting on a slew of mega-cap tech earnings, with results from Alphabet, Microsoft, Amazon, and Intel on tap next week.

The main macro event will be the Fed’s interest rate decision. The central bank is expected to keep rates steady following its policy meeting next Wednesday, while the December rate-hike odds are still elevated at about 71%.