By Stephen Culp and Medha Singh
NEW YORK, June 3 (Reuters) – Wall Street stocks pulled back from record highs on Wednesday as flaring tensions in the Middle East and rising crude prices stoked inflation jitters and convinced investors to take some profits.
All three major U.S. stock indexes closed in negative territory, dragged lower by financials and tech, with the small-cap Russell 2000 underperforming its larger-cap counterparts.
Chips gained 1.4%, indicating the artificial intelligence fervor is alive and well. Even so, six of the Magnificent Seven group of AI-related megacaps ended lower. Meta Platforms was the sole gainer, rising 4.2%.
“The AI names are trading on their own completely separate world, largely oblivious to macro and geopolitical risk, at least within reason,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “And so there’s going to be a bid for those names, especially on days where everything else looks a little bit less attractive.”
The S&P Software & Services index, battered in recent months by fears of AI disruption, slid 4.0%.
Middle East hostilities intensified as the U.S. and Iran traded a new round of air strikes, the latest test of a shaky ceasefire.
Oil prices rose, adding to worries that upward pressure on energy prices could metastasize into broader, systemic inflation.
“This market continues to demonstrate a tug of war between fundamentals in the U.S. economy, which are incredibly positive, and concerns that the duration of the conflict in the Middle East will lead to downside risks,” said Bill Northey, senior investment director at U.S. Bank Wealth Management, Billings, Montana. “Our framework is centered around the duration of the closure of the Strait of Hormuz as the primary input to inflation expectations.”
“The longer the duration of that closure, the less likely the Federal Reserve will be able to ease in 2026,” Northey added.
In fact, financial markets are pricing in a 41.1% likelihood of a rate hike at the conclusion of the U.S. Federal Reserve’s December meeting, up from 9.1% one month ago, according to CME’s FedWatch tool.
New York Fed President John Williams reiterated his position that the central bank does not need to change interest rates despite upside inflation risks, stating monetary policy is “in the right place.”
Economic data suggested the labor market was stable, and the services sector continued to expand, but input prices remained elevated and corporate spending plans appeared soft amid rising energy costs and geopolitical uncertainties.