U.S. Stocks Decline Amid Middle East Tensions and Economic Uncertainty

U.S. stocks fell as investor caution grew following missile attacks by Iran on Israel. Despite a rise in energy stocks, broader market indices like the Nasdaq and S&P 500 declined. Investors were also wary ahead of jobless claims data and a potential Fed rate cut in November.

U.S. stocks ended lower, with the Nasdaq losing more than 1% on Tuesday, as investors grew more cautious after Iran fired missiles at Israel. The missile salvo was a retaliation for Israel's campaign against Tehran's Hezbollah allies. In response, U.S. President Joe Biden directed the military to aid in Israel's defense, according to the White House National Security Council.

While the broader market fell, shares of energy companies rose along with U.S. oil prices, which settled up 2.4%. Defense stocks also saw gains, with Northrop Grumman and Lockheed Martin leading the charge. The S&P 500 aerospace and defense index climbed to a record high, while utilities also advanced.

Airline shares, including Delta Air Lines, declined as investors avoided risk amid Middle East tensions. Although the indexes ended the day off their lows, the level of market uncertainty remained high. "I hope we don't see further escalation," said Peter Tuz, president of Chase Investment Counsel, "but if we do, we could see continued market weakness."

On Monday, the three major U.S. indexes posted strong gains for September and the quarter. Preliminary data showed the S&P 500 lost 54.01 points, or 0.94%, ending at 5,708.47. The Nasdaq Composite dropped 279.35 points, or 1.54%, to 17,909.82, while the Dow Jones Industrial Average fell 171.76 points, or 0.41%, to 42,158.39.

The CBOE's market volatility index, Wall Street's fear gauge, rose. Data released early Tuesday indicated a rebound in U.S. job openings in August, while the Institute for Management Supply's report showed manufacturing activity at 47.2 in September, slightly below estimates of 47.5.

Investors also remained cautious ahead of U.S. jobless claims data on Thursday and monthly payrolls on Friday. Traders are pricing in a 62.2% chance that the Federal Reserve will lower rates by 25 basis points in its November meeting, according to CME Group's FedWatch Tool, with a 37.8% chance for a larger 50 basis point cut.

Meanwhile, a port strike on the East Coast and Gulf Coast has halted about half of the nation's ocean shipping. The strike, which began on Tuesday, is not expected to create supply chain issues as severe as during the COVID-19 pandemic but adds to the economic uncertainties for Fed policymakers. (Additional reporting by Johann M Cherian and Purvi Agarwal in Bengaluru; Editing by Maju Samuel and Richard Chang).

(With inputs from agencies.)