The Big Question for Markets: When Will the Middle East Conflict Be Resolved?

U.S. equity indexes finished a volatile, headline-driven week mixed, as a relatively light economic calendar left investors largely focused on shifting geopolitical developments, oil price volatility, and continued pressure on large-cap technology stocks. Equities rallied to start the week amid optimism that the conflict in the Middle East could de-escalate. However, sentiment deteriorated through the end of the week, as conflicting headlines appeared to undermine confidence in a near-term resolution. 

Ultimately, the S&P MidCap 400 and Russell 2000 indexes closed the week higher, both snapping four-week losing streaks, while the S&P 500 Index and Nasdaq Composite all finished lower for the fifth week in a row. Large-cap value stocks outperformed their growth counterparts for the third consecutive week.  The pan- European STOXX Europe 600 Index advanced 35bps in local currency terms. European Central Bank (ECB) President Lagarde noted that it is too early to decide rate decisions and that policymakers will have to assess the "nature, size, and persistence" of inflationary pressures caused by the Iran War.   

U.S. Treasuries finished close to unchanged despite some midweek yield volatility.  The Investment Office continues to monitor Treasury auctions because they may reveal real-time demand for government debt, which is a strong signal about market sentiment, interest rates, and economic expectations. 

Recent U.S. Treasury auctions have shown weakening demand and rising yields, driven by inflationary fears , elevated oil and gas prices, and Middle East conflict risks. A notable 2-year note auction saw low demand, forcing yields to 3.93%, the highest since July. The 10-year yield reached an 8-month high.  Investor appetite is dipping, forcing primary dealers to take a larger share, reflecting concerns over fiscal policy.   

Key Takeaways 

1. Oil Prices Remain Volatile 

Oil markets whipsawed this week as ceasefire headlines drove sharp swings in both directions. Prices dropped more than -10% early in the week after President Trump described productive discussions and announced a five-day pause in strikes, raising expectations for a diplomatic resolution. Those gains reversed when Iran denied active negotiations and rejected a formal U.S. ceasefire proposal that included reopening the Strait of Hormuz, which remains closed. Iran's counteroffer signals that diplomatic channels are open, but no agreement is close. Why it matters: Oil prices are unlikely to stabilize until there is clarity on whether negotiations can produce a lasting agreement. For investors, each headline-driven swing is a reminder of how much uncertainty remains embedded in energy markets and how quickly that uncertainty can ripple into stocks more broadly. 

2. Markets Traded on Ceasefire Headlines 

U.S. equities traded higher early in the week but reversed lower as the week progressed. The S&P 500 rose +1.3%, with most of the advance coming Monday after reports of U.S.-Iran negotiations sparked a broad relief rally. Markets pulled back the following session as oil rebounded and uncertainty around a deal resurfaced, staged a rebound when news of a formal ceasefire proposal emerged, and ultimately traded lower as tensions escalated again. Why it matters: Stocks remain closely tied to ceasefire signals, with oil prices serving as the most visible real-time gauge of investor confidence in a diplomatic outcome. Until the diplomatic picture clears, the market is likely to remain headline driven. 

3. The Stock Market Rotation Resumes 

Market leadership broadened again this week as the rotation away from the largest stocks reasserted itself. Smaller companies outpaced the broader index during the early-week rally, and value stocks pulled ahead of growth. The pattern is consistent with the trend that emerged in early 2026, when investors began moving toward smaller, more economically sensitive areas of the market. Why it matters: The rotation paused during the recent period of market stress, but it began reappearing this week. One week doesn't confirm a trend, but the broadening is showing up across multiple measures simultaneously, which is more credible than small-cap leadership alone. 

4. Rate Hike Probabilities Creep into Fed Futures Pricing 

Interest rate expectations shifted again this week as investors began pricing in the possibility that the Federal Reserve could raise rates later in 2026. Futures markets showed the probability of a rate increase rising above 50% in late 2026, with the market starting to price in a rate hike due to concerns that a sustained rise in oil prices will reignite inflation. At the same time, inflation expectations have edged slightly lower, suggesting the market views current price pressures as temporary rather than structural. Why it matters: The conversation around the Fed has shifted from when cuts might arrive to whether a rate hike is possible. If oil stabilizes and inflation expectations remain anchored, those hike probabilities could fade. However, the shift itself is a reminder that Fed policy remains uncertain, with the potential for interest rates to remain higher for longer than expected.