The S&P 500 (SNPINDEX: ^GSPC) fell sharply in March when the Iran conflict pushed oil prices above $100 per barrel for the first time since 2022. The index has already recovered its losses, but the rebound may have been premature.
Geopolitical tensions are still elevated, energy prices are still increasing, and no one knows when the situation will improve. Federal Reserve Chair Jerome Powell said as much during a recent press conference: “The economic outlook remains highly uncertain and the conflict in the Middle East has added to this uncertainty.”
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Meanwhile, Fed officials recently warned that inflationary pressure could lead to interest rate hikes, and the S&P 500 just sounded an alarm last witnessed during the dot-com crash. Here’s what investors need to know about the current market environment.
The Federal Reserve says inflationary pressure could lead to interest rate hikes
The Federal Reserve’s biannual financial stability report identifies and assesses risks to the U.S. financial system. The latest report was released in May 2026, and it ranked geopolitical tension and elevated oil prices as the most pressing concerns.
“Inflationary pressure from an energy shock could force central banks to tighten monetary policy even if economic growth were to weaken,” warned the Fed Board of Governors. That could be particularly bad in the current environment because stocks already trade at very rich valuations by historical standards.
Under normal circumstances, the Fed would cut rates to stimulate a weak economy. But inflation accelerated substantially in March due to soaring energy prices caused by the Iran conflict, and inflation may continue climbing as the oil shock drives up manufacturing and transportation costs. In that scenario, the Fed may be forced to raise its benchmark rate.
That could sink the stock market in several ways. Higher interest rates would hurt corporate earnings, both directly by increasing interest expense and indirectly by reducing consumer demand. Higher interest rates would also make bonds more attractive, which could cause investors to sell stocks.
Historical context is valuable here. The Federal Reserve’s last rate-hike cycle started on March 17, 2022, and the S&P 500 fell 17% in the next three months. In fact, the Fed has initiated four rate-hike cycles since 1999, and the S&P 500 has always declined over the next three months, with an average drawdown of 7%.
