US Stocks Fall Third Day Amid Middle East Tensions

US stocks experienced a third consecutive day of declines on Friday, as escalating tensions in the Middle East overshadowed hopes for a Federal Reserve rate cut. The S&P 500 index fell by 0.22%, closing at 5,967.84, while the Nasdaq Composite index lost 0.51% to end at 19,447.41. The Dow Jones Industrial Average was the sole index to remain positive, rising by 35.16 points, or 0.08%, to finish at 42,206.82.

The initial optimism on Wall Street was short-lived as traders quickly realized that the geopolitical situation had not improved. President Donald Trump, now leading from the White House again, has not ruled out taking military action against Tehran and is expected to make a final decision within the next two weeks. This uncertainty has dampened traders' confidence in holding long positions over the weekend.

Earlier in the week, Federal Reserve Governor Christopher Waller hinted at the possibility of a rate cut as early as July. Speaking on CNBC’s Squawk Box, Waller stated that the Fed could move forward with a rate cut in July, although he clarified that this was his personal view and did not guarantee full committee support. This signal initially lifted markets, but the optimism was short-lived as Federal Reserve Chairman Jerome Powell later stated that decisions would remain "data dependent," especially given the uncertainty surrounding Trump's tariffs and their potential impact on the economy. Powell's comments raised questions about the likelihood of a July rate cut, shifting market focus back to the geopolitical tensions in the Middle East.

By Friday afternoon, the market's attention had fully shifted to the Persian Gulf, where tensions between the US and Iran continued to escalate. Iran's Supreme Leader Ayatollah Ali Khamenei described the US demand for Iran's full surrender as "threatening and ridiculous," further fueling market uncertainty. Sam Stovall, the chief investment strategist at CFRA Research, noted that the current environment is too unstable for traders to feel confident about holding long positions over the weekend. Despite the S&P 500 being only 3% away from its recent 52-week high, Stovall cautioned that prior highs often act as resistance levels, requiring multiple attempts before breaking through.

Semiconductor stocks were particularly hard hit on Friday following a report that the US government might revoke special export waivers for certain chipmakers. This news sent shockwaves through the semiconductor sector, with Nvidia dropping more than 1% and Taiwan Semiconductor Manufacturing falling nearly 2%. The VanEck Semiconductor ETF (SMH) slid close to 1%, dragging down the broader indexes. Some analysts believe that the market's next significant move will depend on the economy's performance. Joe Kalish, the chief macro strategist at Ned Davis Research, wrote that a deep drop in the market would likely require a recession. He noted that while the economy is not currently in recession, there are warning signs such as weaker-than-expected housing starts and retail sales.

Despite these concerns, the long-term outperformance of US stocks over emerging markets has reached record levels. Since 2009, the S&P 500 has returned 562%, while the Emerging Markets ETF has only gained 163%, about 3.4 times less. The performance ratio between US equities and emerging markets has now fallen to its lowest point in 55 years, about one standard deviation under its historical average. Even during the Dot-Com Bubble peak in 2000, the ratio was not as skewed.