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Investors are losing confidence in a quick end to the Middle East conflict, and equity indices are slipping into a correction one after another. The Russell 2000 index led the move, followed by the Nasdaq Composite. The S&P 500 is next, recording its worst daily drop since January as Iran refuses talks proposed by the US. Both Washington and Tehran are making maximalist demands, far higher than before hostilities began, which casts doubt on whether the parties can find common ground.
Time is not working in favor of the US equity market. Each day of the Iran war keeps oil prices elevated, increasing the risk of a slowdown in the US economy and, ultimately, a recession. It is no surprise that the Russell 2000 was the first to enter correction territory. Small-cap companies are highly sensitive to economic conditions, while signs of cooling prompt investors to sell equities.
Dynamics of stock indices after sell-offs
There is some good news. Post-sell-off rallies in the Russell 2000 typically outpace those in the S&P 500. According to the Treasury secretary, such a period may arrive soon. Scott Bessent says an end to the Middle East conflict would push oil prices down and slow inflation. Donald Trump is attempting to calm markets by claiming that talks are constructive and that he expected more upside from Brent and WTI. Major crude grades may still rise a little further, but then will clearly move lower.
Nevertheless, the timing of that "then" is unknown. Markets are pricing in a grim outlook for the US economy, and investors are selling the Russell 2000, which started 2026 strongly. The Nasdaq Composite is following into correction territory.
If at the start of the Iran war, investors hoped tech companies would act as a shelter from geopolitical stress, sentiment changed by the end of March. The first blow to Big Tech came from the rally in US Treasury yields. The second was a court ruling recognizing the negative impact of social networks on user health. That crushed Meta Platforms' stock and dragged the Magnificent Seven to lows not seen since August.
When Trump's put fails, the Fed is not cutting rates, and investors have lost faith in a quick resolution of the Middle East conflict, the broad equity index has little choice but to follow the Russell 2000 and the Nasdaq Composite into correction territory. Time is not on its side.
Technically, the daily S&P 500 chart shows an intensifying pullback toward the downtrend. This is evidenced by quotes moving away from the moving averages. Short positions established from the pin-bar low near 6,565 can be increased on a decisive break of local lows near 6,470. Targets at 6,420 and 6,290 remain relevant.
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