Global equity markets extended their Iran-war losses on Thursday as the Dow Jones Industrial Average shed 784 points and the S&P 500 closed in negative territory for 2026, completing a sharp reversal from the record highs of late February. The selloff — now in its fifth consecutive trading session — reflects deepening investor uncertainty over the duration and economic cost of the US-Israeli military campaign against Iran, which entered its sixth day on March 5.
The S&P 500 shed 0.56% to close at 6,830.71, bringing the index into negative territory for the calendar year — a benchmark the broad market last held above only on February 28. The Nasdaq Composite declined 0.26% to 22,748.99, partially cushioned by the relative defensiveness of mega-cap technology holdings. Small-cap stocks bore the sharpest impact: the Russell 2000 tumbled 2.7%, its third consecutive session decline, dragging the index into the red for the week.
Sector Rotation: Materials and Industrials Bear the Brunt
Within the S&P 500, the damage was not distributed evenly. The S&P 500 Materials sector fell 2.4% — the worst performer among the index's eleven primary groups — while Industrials declined 2.3%. Both sectors face compounding headwinds: elevated energy input costs from surging crude prices, and the risk that prolonged conflict could dampen global manufacturing demand. Heavy-equipment names felt particular pressure, with Caterpillar off 4.4% and GE Aerospace declining 3.5% on the session.
Defense and aerospace, however, broke sharply from the broader market trend. In London, BAE Systems advanced more than 6% as investors positioned for accelerated NATO procurement timelines and a potential surge in government defence budgets across the alliance. Germany's Rheinmetall gained approximately 2% in Frankfurt trading. The divergence underscores a pattern that has accompanied each major Middle East conflict in recent decades: a swift rerating of defence-exposed equities against a backdrop of falling civilian industrials. Tracking the implied US market dynamics around this conflict is covered in depth by US Market Updates, which is following the S&P 500's sector-by-sector response.
European and Asian Markets: Broad Risk-Off Across Regions
The selloff began in Asian and European time zones on March 2, the first full trading day after US-Israeli airstrikes on Tehran were confirmed late on February 28. The STOXX Europe 600 fell 1.76% at the open on March 2, with the UK's FTSE 100 declining 0.63% — a smaller move partially explained by London's significant energy weighting, which benefits from elevated crude prices. Japan's Nikkei 225 closed 1.35% lower on the same session, while South Korea's KOSPI dropped 1% before the government's subsequent activation of its Won100 trillion stabilisation fund produced the sharp rebound reported separately.
The geopolitical dimensions driving this cross-regional equity pressure are being tracked closely by analysts focused on US foreign policy and its market transmission mechanisms. Foreign Diplomacy has published a detailed breakdown of how the military operation's scope — including strikes on Iranian naval assets and drone incursions into Azerbaijan — is expanding the conflict's potential to affect non-Gulf energy producers and transit routes.
Dollar Surges; Gold Fails to Deliver Classic Safe-Haven Response
Currency markets delivered one of the more striking signals of the week. The US dollar rose nearly 1% against a standard basket of foreign currencies on the opening day of hostilities, March 2, sustained by two reinforcing dynamics: oil contracts are denominated in dollars, creating additional USD demand as crude surged, and geopolitical shocks historically trigger capital repatriation to US assets. Treasury bonds — normally the go-to safe haven in risk-off episodes — sold off rather than rallied, with yields rising as investors priced in higher inflation from energy costs and reduced confidence in near-term Fed rate cuts.
Gold's behaviour has been particularly notable. Spot gold fell 1.0% to $5,080.86 on Thursday, and gold futures declined 0.7% to $5,098.20. The metal had briefly reached a fresh all-time high in the immediate aftermath of the airstrikes on March 1, but has since retreated as the dollar's strength suppressed commodity prices quoted in USD and as some institutional investors sold gold positions to cover margin calls in equity portfolios. The divergence from gold's typical wartime premium suggests markets are currently prioritising dollar liquidity over physical asset stores of value — a pattern that historically resolves in gold's favour over a multi-week horizon if the conflict persists.
Outlook: Sentiment Data and Economic Calendar
Retail investor sentiment has deteriorated measurably. The American Association of Individual Investors' weekly survey for the period ending March 4 found bullish sentiment at 33.1% — the lowest since late November 2025 — while bearish respondents stood at 35.5%. Neutral sentiment jumped to 31.4%, its highest reading since mid-January 2025. Separately, the Atlanta Federal Reserve's GDPNow model was tracking first-quarter annualised US growth at 3.0% as of March 2, though that estimate is due for revision Friday as new data arrives. Analysts are watching closely for any downward revision that would signal the energy-price shock is beginning to affect the consumption and investment components of GDP.
Historical analogues offer some measured comfort. Wells Fargo strategists noted this week that in the months following both the 1991 Gulf War and the 2003 Iraq invasion, the S&P 500 rose 16% and 14% respectively once the initial conflict phase resolved. JPMorgan economists, however, caution that the current conflict carries greater macroeconomic risk than those episodes, primarily through its potential to restrict Strait of Hormuz flows — a waterway through which approximately 20% of global LNG and 15% of global oil supply transits. The next key market-moving data points include: the US February non-farm payrolls report (due Friday), an updated GDPNow estimate, and any diplomatic developments from Gulf state mediators attempting to establish a ceasefire framework.
