Dow slips 500 points, Nasdaq crashes 1.6% on Middle East escalation

US equities tumbled on Monday after the United States and Israel launched coordinated strikes on Iran over the weekend, escalating geopolitical tensions and sending oil prices sharply higher.

The Dow Jones Industrial Average fell 543 points, or 1.1%.

The S&P 500 declined 1.1%, while the Nasdaq Composite futures dropped 1.6%, reflecting broad-based selling across risk assets.

CBOE Volatility Index, widely known as Wall Street’s fear gauge, jumped to its highest level of 2026, underscoring heightened demand for portfolio protection.

US crude prices rose 7% amid fears that the confrontation could expand into a wider regional conflict and disrupt global energy supplies.

Iran is the fourth-largest oil producer within OPEC, and any sustained supply disruption could have ripple effects across global markets.

The trajectory of oil prices will likely hinge on whether fighting interferes with traffic through the Strait of Hormuz, the world’s most critical chokepoint for crude flows.

A prolonged interruption could tighten global supply and reignite inflation pressures that investors had hoped were easing.

Regional fallout raises escalation fears

The joint US-Israeli operation reportedly killed Iran’s Supreme Leader Ayatollah Ali Khamenei, marking one of the most consequential events for the Islamic Republic since 1979.

Iranian officials vowed forceful retaliation, raising the risk of further escalation across the Middle East.

Explosions were reported in cities including Dubai and Abu Dhabi, intensifying concerns about spillover effects.

President Donald Trump has told several media outlets that US military operations in Iran were “ahead of schedule.”

However, investor anxiety remains elevated over the possibility of a prolonged conflict.

Ajay Rajadhyaksha, an analyst at Barclays, said in a note that the tail risk of a sustained conflict is higher than in prior flare-ups in 2024 or 2025.

While he does not expect the war to escalate to a point that drastically alters the US economic outlook, he cautioned that “it is too early to buy any dip,” particularly given investors’ recent experience of quick de-escalations.

Defence and energy stocks advance

Defence and energy names outperformed amid the geopolitical tensions.

Shares of Northrop Grumman rose 3%, while Lockheed Martin and RTX gained about 4%.

Energy stocks also moved higher, with Exxon Mobil advancing 3% and Chevron up 1%.

However, a broader risk-off tone weighed on most sectors.

Technology and financial stocks led the declines, with chipmakers such as Broadcom falling.

Amazon and Alphabet traded lower, while financial institutions, including Morgan Stanley and Goldman Sachs, also declined.

Fragile backdrop for equities

The latest geopolitical escalation adds to an already fragile environment for equities.

The S&P 500 had already sold off Friday, finishing February in negative territory amid renewed volatility in artificial intelligence and software shares.

Investor concerns about AI-driven automation potentially disrupting business models and triggering layoffs have weighed on sentiment.

Citi equity strategists said in a note that while the market impact may be short term, a more protracted friction for equities cannot be ruled out.

They added that the Middle East conflict now joins a growing list of concerns, including the durability of the AI spending boom and the tension between promised productivity gains and potential business-model disruption.

With oil prices surging, volatility rising, and geopolitical uncertainty intensifying, investors face a complex mix of risks that could test market resilience in the weeks ahead.