The S&P 500 gave back all of its 2026 gains as war rages in the Middle East

Wall Street woke up to an old-fashioned reminder that the global economy still runs on pipes, not PowerPoints. By late morning Tuesday, the S&P 500 was down more than 2% and sitting at its lowest level in more than two months, wiping out all of its 2026 gains and leaving it roughly 4% below its late-January record.

Meanwhile, the Dow was off about 1,084 points, and the Nasdaq $NDAQ -0.88% was down about 2%. The headline moves look a lot like a simple risk-off day.

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The mechanics are more complicated: Oil and natural gas are climbing on fears that the Middle East conflict is widening into the world’s energy plumbing, and the market immediately priced that as a longer, stickier inflation problem. Iran threatened to block vessels transiting the Strait of Hormuz, and there have been reported production halts by regional oil and gas producers — the kind of supply anxiety that doesn’t stay politely confined to the commodities desk (or any other sort of desk, for that matter).

When energy risk jumps, investors start repricing everything that depends on lower inflation and easier money arriving on schedule. Treasuries didn’t provide the usual comfort blanket; the 10-year yield pushed higher, and traders shifted expectations for the next Federal Reserve rate cut to September from July. The volatility gauge followed the script, popping to a three-month high (and nearing the level where markets turned higher last October) — a neat little confession that everyone suddenly remembers what hedges are for.

The sector tape read like a stress test. Travel names got tagged as crude climbed, miners slid, and small caps dropped harder than the big benchmarks — the usual penalty box for anything with thinner margins and more refinancing risk.

Then there’s the part that makes traders sit up straighter: credit. In Europe, default insurance costs jumped, with the iTraxx Crossover index (junk) rising to about 270 basis points and the iTraxx Main (investment grade) to about 57 basis points on Monday. Spreads moving like that doesn’t guarantee a crisis, but it does mean the market is charging more for optimism.

And in the U.S., private credit delivered its own little plot twist. Blackstone’s flagship private credit fund, BCRED, saw $3.7 billion in withdrawals during the quarter and redemption requests totaling 7.9%, prompting Blackstone to lift its usual redemption cap to 7% and put $400 million of employee capital into the fund to help meet all of the requests.

Put all of that together, and the story stops being “the S&P had a bad day.” It becomes “markets are repricing the cost of energy risk, and the Fed calendar is collateral damage.” On days like this, the S&P goes back to where the year started and forces everyone to ask: What does all of this cost now?

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