Wall Street faced heightened volatility this week as rising geopolitical tensions in the Middle East sparked investor concerns. Major indexes posted losses for the third day in a row as traders monitored the escalating situation closely for any signs of further conflict.

The benchmark S&P 500 index ended Thursday down 0.9%, marking its third consecutive decline. The tech-heavy Nasdaq dropped 0.8% while the Dow Jones Industrial Average fell 0.7%.

Tesla shares sank over 9%, dragging down the market after the electric vehicle maker reported disappointing Q3 results. Rising bond yields also weighed on stocks as the 10-year Treasury yield approached 5% and the 2-year yield pulled back after comments from Federal Reserve Chair Jerome Powell.

Powell Remarks Signal Caution on Rate Hikes But Long-Term Inflation Uncertainty

In a speech on Thursday, Powell said the Fed will proceed carefully with future interest rate increases but is not convinced where inflation will settle in coming months. His remarks led to reduced bets of another jumbo rate hike at the November meeting, though Powell emphasized each decision remains “live” based on the data.

Markets are now pricing in just a 50% chance of a 0.75 percentage point hike next month, with a start to rate cuts anticipated in mid-2023. Powell cited evidence that policy may not be “too tight” currently but said long-term yields are rising due to increased term premiums rather than expectations of higher short-term rates.

Other Fed officials reiterated the need to control inflation but struck a measured tone. Chicago Fed President Austan Goolsbee said he hopes to avoid recession amid rapid hikes but wants inflation solidly on a path back to 2%.

Analysts noted Powell lacked urgency to intervene in rising bond yields, signaling rates may still need to move higher to ensure price stability. However, his remarks ruled out additional large hikes for now as the Fed assesses the impact of its actions so far.

Oil Prices Climb on Middle East Unrest While Housing Slump Deepens

Geopolitical tensions pushed oil prices higher Thursday, with WTI crude rising 2.5% to over $90/barrel on supply concerns. Brent crude also topped $92.

The US is facing increased drone attacks in Iraq and Syria while Houthi rebels in Yemen fired missiles toward Israel. An American destroyer intercepted the inbound fire in the Red Sea. The clashes stoked fears of potential supply chain disruptions and shortages.

Meanwhile, existing home sales plunged to the lowest level since 2010 in September, down 1.5% as high mortgage rates exceeding 7% continue to crush affordability. Housing inventory rose but still remains historically low.

Other economic data showed jobless claims at a 3-month low, underscoring the strength of the labor market. But recession fears linger given the Fed’s steep rate hikes intended to tame inflation.

Earnings Roundup: Netflix, Airlines Beat While Chip Equipment Slows

Corporate earnings painted a mixed picture this week. Netflix added over 2 million subscribers last quarter, beating projections and sending shares up 13%. Strong international growth offset losses in North America.

American Airlines topped profit estimates as travel demand remained resilient despite concerns of an economic pullback. However, it issued weaker Q4 guidance on rising costs.

Railroad giant Union Pacific’s earnings topped lowered estimates. It leaned on efficiency gains to offset lower volumes and higher expenses. AT&T raised full-year cash flow outlook on strong wireless growth.

However, Lam Research posted a third straight revenue decline as chip capital equipment spending softens. Blackstone’s profit dropped 12% amid dealmaking slowdown. Las Vegas Sands announced its first buyback since 2020, showing management confidence after pandemic woes.

Outlook Remains Uncertain as Markets Weigh Conflict Risk, Inflation Fight

With geopolitics in flux and the Fed’s inflation battle ongoing, volatility is likely to remain high according to analysts. While a near-term pause in aggressive hikes provides some relief, uncertainties around oil, housing and corporate health linger.

Investors face difficulty planning around external shocks like Middle East clashes that could worsen supply constraints. At the same time, the full impact of rapid rate increases remains unknown.

For now, expect continued caution and choppiness as markets weigh risks. Any signs of de-escalation in global hotspots could aid sentiment, but challenges around inflation and growth headwinds persist.

Agility and securing quality assets for the long-term may represent the wisest course until more clarity emerges on the policy and geopolitical fronts. Stay tuned to our market coverage for the latest developments.