US stocks fell for the third straight day as Middle East tensions outweighed Fed rate cut hopes

Stocks slipped for a third straight session on Friday, with traders dumping risk as Middle East tensions kept heating up. The S&P 500 dropped 0.22%, closing at 5,967.84, while the Nasdaq Composite lost 0.51% to end at 19,447.41.

Only the Dow Jones Industrial Average stayed afloat, up 35.16 points, or 0.08%, finishing at 42,206.82. This comes as traders completely ignored a fresh signal from the Federal Reserve that a July rate cut might actually happen.

The early bounce on Wall Street quickly faded once people realized that none of the geopolitical chaos had changed. President Donald Trump, now leading from the White House again, hasn’t ruled out striking Tehran, and according to CNBC, he plans to make a final decision within the next two weeks. This kind of risk doesn’t exactly give traders the confidence to go long into a weekend.

Waller hints at a July cut but Powell holds the brakes

Things started upbeat after Christopher Waller, a Federal Reserve Governor, told CNBC’s Squawk Box that the Fed could move forward with a rate cut as early as July. “I think we’re in the position that we could do this and as early as July,” Waller said. He clarified that this was his personal view and didn’t guarantee full committee support, but the signal was strong enough to lift markets—at least for a few hours.

Two days earlier, Jerome Powell had told reporters that the Fed wasn’t rushing anything. He said decisions would stay “data dependent,” especially since no one really knows how Trump’s tariffs will hit the economy yet. The S&P 500 dipped slightly after those comments. Powell’s warning put a question mark over July and left markets wondering how solid that potential cut really is.

By Friday afternoon, the focus had fully shifted to the Persian Gulf. Trump, who previously demanded Iran’s full surrender, is now weighing military options. Iran’s Supreme Leader Ayatollah Ali Khamenei called the demand “threatening and ridiculous,” and with that, stocks stopped caring about rate cuts.

Sam Stovall, the chief investment strategist at CFRA Research, said the environment is too unstable for confidence. “With so much uncertainty going on in this world, who really wants to go long over the weekend,” Sam said. He added that even though the S&P 500 is still only 3% away from its recent 52-week high, that doesn’t make it an easy breakout. “Prior highs act like rusty doors and require several attempts before finally swinging open.”

Semiconductor stocks slump after fresh policy threat

Tech got smoked Friday after a Wall Street Journal report said the US government might revoke special export waivers for certain chipmakers. That hit the entire semiconductor sector. Nvidia dropped more than 1%, while Taiwan Semiconductor Manufacturing fell nearly 2%. The VanEck Semiconductor ETF (SMH) slid close to 1%, dragging the broader indexes with it.

Some analysts think the market’s next big move depends entirely on whether the economy holds up. Joe Kalish, the chief macro strategist at Ned Davis Research, wrote that a deep drop would only happen if the US hits a recession. “A new low would likely require a recession call,” Joe said. “The economy is not currently in recession and we do not foresee one in the second half of the year.”

But there are warning signs. Housing starts for May came in weaker than expected. Retail sales also missed forecasts. Traders are watching for cracks, and some are already showing up.

At the same time, long-term outperformance by US stocks over emerging markets is reaching record levels. Since 2009, the S&P 500 has returned 562%, while the Emerging Markets ETF ($EEM) has only gained 163%. That’s about 3.4 times less.

Even worse, 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 wasn’t this skewed.