Soft Inflation Data Meets Middle East Turmoil: This Week In Markets

U.S. markets ended a choppy week on a cautious note, as modest gains through Thursday reversed sharply on Friday after escalating tensions between Israel and Iran rattled investor sentiment.

Major equity indices, which had been hovering near all-time highs, pulled back as geopolitical risks surged back to the forefront.

The S&P 500 – as tracked by the Vanguard S&P 500 ETF (NYSE:VOO) – ended 1.1% lower for the week, falling below the 6,000-point threshold.

Oil's Back In Focus—And Gold Is Eyeing New Highs

Late Thursday, Israel launched “Operation Rising Lion,” a sweeping aerial campaign targeting approximately 100 Iranian nuclear and military installations, reportedly killing several high-ranking officials. Iran responded by launching over 100 drones toward Israeli territory and vowed severe retaliation, raising fears of a broader regional escalation.

Oil markets reacted swiftly: West Texas Intermediate crude surged past $70 a barrel, capping a double-digit percentage gain for the week — its strongest in years.

On the economic front, the much-feared tariff-driven inflation failed to materialize in May, with consumer and producer price reports generally coming in broadly below expectations.

Under normal circumstances, such data would have bolstered hopes for Federal Reserve rate cuts and likely sparked a rally on Wall Street. But the rally failed to materialize as soaring energy prices clouded the disinflation narrative.

Sector-wise, energy stocks led the weekly gains, buoyed by the oil rally, while financials underperformed. Oracle Corp. (NYSE:ORCL) delivered a standout performance – climbing by over 20% on its best weekly return since 2001 – following stronger-than-expected quarterly earnings and upbeat guidance.

Currency markets were also in motion. The U.S. dollar came under renewed pressure, with a key index tracking the greenback falling to its lowest level in over three years.

Investors appeared increasingly uneasy about the long-term trajectory of U.S. fiscal policy, particularly as President Donald Trump's sweeping "One Big, Beautiful Bill" heads to the Senate.

Safe-haven demand for precious metals remained robust. Gold extended its powerful 2025 rally, supported by both geopolitical instability and persistent worries over the U.S. debt burden. The precious metal is on track to deliver its strongest first-half performance since 1982.

Silver also inched higher, hitting the highest levels since 2012. 

All eyes now turn to the Federal Reserve's policy meeting next week. While no change to interest rates is expected, markets will scrutinize any shifts in the Fed's economic projections. In March, policymakers forecast 2025 GDP growth at 1.7% — down from 2.1% in December — and a 2.7% average inflation rate, revised upward from 2.5%.

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Image created using artificial intelligence via Midjourney.