US Stocks Fall as Trump Downplays Israel-Iran Truce Prospects

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(Bloomberg) — US stocks declined on Tuesday as President Donald Trump played down a potential truce between Israel and Iran, and retail sales data came in softer than expected.

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The S&P 500 Index fell 0.4% as of 9:44 a.m. in New York, ahead of the Federal Reserve decision on Wednesday. The tech-heavy Nasdaq 100 Index fell 0.6%. The Cboe VIX Index hovered around 20, a key level indicating traders are growing increasingly cautious.

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“The downside risks to today’s expensive stock market have become bigger than the upside potential,” according to Miller Tabak’s Matt Maley. Comments from Trump, as well as Israeli Prime Minister Benjamin Netanyahu, mean that a ceasefire in the Middle East “is unlikely any time soon.”

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Fighting between Israel and Iran continued into a fifth consecutive day. Confidence in hostilities being contained suffered a blow amid the fast-moving developments in the Middle East.

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Trump left the Group-of-Seven leaders meeting in Canada abruptly to deal with the conflict, warning residents of Tehran to evacuate the city and that Iran couldn’t have a nuclear weapon. Trump told reporters he was looking for a “real end, not a ceasefire.” The Republican has not outlined his next steps, and left open the potential for further talks on Iran’s atomic activities.

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If attacks by Iran halt traffic in the Strait of Hormuz, oil prices could spike to $120 a barrel, according to Jim Reid, global head of macro research and thematic strategy at Deutsche Bank AG.

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“That would be a big negative for the equity market,” Reid told Bloomberg Television. “You would still think that it would be resolved at some point and you would have the same kind of playbook of a sharp fall and then a sharp recovery. But it would probably be bigger and it would take longer.”

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Adding to the pain for equities were a tepid reading on retail sales. Data showed that retail sales fell by the most since the start of the year in May, which suggests new tariffs had deterred consumers from spending, particularly on cars.

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“The US consumer has kept economic growth going despite the tariff threats and trade disruptions,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “If the consumer begins to rollover, then it could lead to layoffs and a vicious cycle of slower spending and higher unemployment.”

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Meanwhile, global stocks are expected to beat US equities over the next five years, according to Bank of America Corp.’s latest fund manager survey, adding to the evidence that investors increasingly see America’s market dominance as coming to an end. 

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Some 54% of asset managers expect international stocks to be the top asset class, while 23% picked US stocks, according to the survey. Only 13% said gold will deliver top returns, and 5% are betting on bonds. This was the first time Bank of America’s survey has asked investors to predict which asset class will perform best over a five-year horizon.

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Among singular stocks, the Magnificent Seven grouping of mega-cap tech stocks traded lower on concerns over tensions in the Middle East. Meanwhile, homebuilder Lennar Corp. rose after better-than-expected gross margins overshadowed a miss on its new orders outlook.

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