Dow falls 400 pts as oil prices surge and Fed rate hike bets rise

US stocks fell on Tuesday as investors began September amid rising oil prices, higher global bond yields and renewed concerns over inflation.

The Dow Jones Industrial Average declined 0.79%, while the S&P 500 and Nasdaq Composite also closed lower as markets assessed the potential impact of renewed US-Iran hostilities on energy prices and Federal Reserve policy.

Stocks fall as oil prices fuel inflation concerns

The Dow shed 419.02 points, or 0.79%, to end at 52,766.88. The S&P 500 declined 0.71% to 7,631.47, while the Nasdaq Composite fell 1.03% to 26,099.77.

Oil prices rose sharply after the US launched fresh strikes against Islamic Revolutionary Guard Corps targets in Iran.

US West Texas Intermediate crude gained 5.2% to settle at $90.22 a barrel, while Brent futures rose 4.6% to close at $94.65.

The latest increase extended oil's advance after military action between the US and Iran resumed. A tanker traveling through the Strait of Hormuz was also hit by three unknown projectiles on Monday.

The escalation has increased concerns that disruptions to energy supplies could persist, adding to inflation pressures and creating further uncertainty for financial markets.

Energy was the strongest-performing sector among the 11 major S&P 500 sectors, supported by higher crude prices.

The Dow Jones Transportation Average was among the biggest laggards, while all constituents of the Philadelphia Semiconductor Index ended lower.

Global bond yields climb as Fed hike bets rise

Bond yields continued to move higher across major economies, adding pressure to equities.

The US 10-year Treasury yield reached levels not seen since January 2025, while Japan's 10-year yield climbed to its highest level since August 1996. Germany's benchmark yield also reached a high not seen since 2011.

Markets have been concerned that elevated oil prices could keep inflation higher and influence central bank decisions.

The Federal Reserve is scheduled to meet later this month, with investors increasingly pricing in the possibility of a rate hike.

CME's FedWatch tool showed a roughly 68% probability of a 25-basis-point rate increase at the September meeting, up from 39.6% a week earlier.

Recent economic data has provided mixed signals.

The Labor Department's JOLTS report showed slower labor-market churn, while manufacturing activity has weakened and residential construction spending has declined.

The data also pointed to continued price pressures and uncertainty linked to tariffs and geopolitical tensions.

September begins with seasonal and geopolitical risks

The market's decline also comes as investors enter a month that has historically been challenging for equities.

September has recorded the weakest average stock-market performance of any month since 1926, according to data cited by Fisher Investments.

Renewed US-Iran fighting has added another source of uncertainty.

The US launched new airstrikes around the Strait of Hormuz, while Iran warned that it could prevent oil exports from the Gulf. The US has also indicated that additional sanctions against Iran could be announced.

Investors are now awaiting the August nonfarm payrolls report due Friday, alongside other economic indicators, for clues about the Federal Reserve's next move.

With oil prices rising and bond yields climbing, markets remain sensitive to any evidence that inflation could stay elevated.

The combination of geopolitical risks, tighter financial conditions and uncertainty over monetary policy weighed on stocks as the new month began.