Dow rallies 300 points, oil retreats as investors bet Israel-Iran conflict will be contained

Stocks rebounded on Monday as investors were optimistic that the conflict between Israel and Iran may remain contained. The spike in oil prices due to the escalating conflict also eased.

The Dow Jones Industrial Average rose 270 points, or 0.6%. The S&P 500 advanced 0.8%, while the Nasdaq Composite surged 1.4%.

WTI crude oil futures fell more than 2% to $71.18 a barrel after trading above $77 in the overnight session.

Traders have been closely watching the Middle East after Israel’s strike on Iran Friday. Iran launched missiles in retaliation, increasing the severity of conflict in the region.

However, there was some optimism on Monday that the situation wouldn’t escalate after Iran reportedly asked several countries, including Saudi Arabia, to urge President Donald Trump to put pressure on Israel for an immediate ceasefire, NBC News reported, citing a Middle East diplomat with knowledge of the situation. The ceasefire would be in exchange for Iran’s flexibility on nuclear talks, the diplomat said.

“The market is taking comfort from the prospect that the conflict could stay in the limited war mode,” Krishna Guha, Evercore ISI’s vice chairman, said in a note Monday. “We assess this is possible but continue to anticipate the conflict will last for a few weeks in the base case and still see elevated risk of escalation that envelops energy and draws in the U.S.”

The attacks continued for a fourth day Monday, with the two countries targeting each others’ energy facilities, an escalation which could rattle the global economy and markets further in the new week. Iran said it is considering shutting down the Strait of Hormuz, a key route for the global oil market. Israel claimed on Monday to have achieved “aerial superiority” over Iran, according to a military spokesperson.

The conflict prompted a sell-off in stocks on Friday, with the Dow tumbling more than 700 points and all three of the major indexes dropping more than 1%. The Dow finished the week down 1.3%, while the S&P 500 and Nasdaq Composite lost 0.4% and 0.6%, respectively.

Oil prices initially surged following Israel’s attack, weighing on risk assets. Gold prices also rallied, as the metal is considered a safe haven trade that investors flock to in times of market volatility.

All “Magnificent Seven” stocks were higher Monday, as the pullback in oil prices caused investors to take on more risk again.

 Tesla was up more than 1%, and Meta Platforms increased more than 2%, bolstered by news that ads are coming to WhatsApp. 

Meanwhile, Palantir, which is viewed as a beneficiary of increasing global conflict, moved more than 3% higher.

Investors also digested weaker-than-expected manufacturing survey data Monday morning, which came ahead of the Federal Reserve’s interest rate decision on Wednesday.

Fed funds futures are pricing in a 100% likelihood of the central bank keeping rates unchanged, per CME Group’s FedWatch tool, even as Trump has been pressuring Fed Chair Jerome Powell for a rate cut. Higher oil prices from the Middle East conflict likely further reduce the odds the Fed will ease monetary policy anytime soon.