U.S. stocks fell sharply Friday, closing out the week on a turbulent note as geopolitical tensions surged following reports that Iran had launched missiles at Israel. The escalation in the Middle East sent shockwaves through global markets, overshadowing cooling inflation data and growing bets on Federal Reserve rate cuts.

The Dow Jones Industrial Average dropped 769.83 points, or 1.79%, to 42,197.80. The S&P 500 fell 68.29 points, or 1.13%, to 5,976.97, and the Nasdaq Composite slid 255.66 points, or 1.30%, ending at 19,406.80. The Russell 2000 shed 1.83%.

News of the Iranian missile attack on Israeli territory jolted investors early Friday, sparking a flight to safety that sent equities lower and drove fresh demand for U.S. Treasurys and gold. The attack, which marked a escalation in hostilities, introduced new geopolitical risk into a market already grappling with monetary policy uncertainty and high valuations. Iran was responding to Israel's attack which targeted Iran's nuclear facilities and top military leadership.

The timing of the attack also complicated an otherwise constructive macroeconomic backdrop. Earlier in the week, investors had cheered a softer-than-expected May Producer Price Index, which showed continued disinflation at the wholesale level. Core PPI rose just 0.1% month-over-month—half the consensus estimate—while a key "super-core" measure of inflation also showed minimal pressure.

Markets had responded by increasing bets that the Federal Reserve could cut rates as soon as September. Futures now imply an 80% probability of a September cut, with a second move priced in for October, pulled forward from December.

Technology shares also came under pressure, led by a retreat in AMD despite a high-profile product launch. The company’s “Advancing AI 2025” event on Thursday unveiled new high-performance AI chips and partnerships with Meta, Oracle, and OpenAI. Yet shares slipped after failing to break above technical resistance, with analysts citing execution risks and longer-term monetization concerns despite the promising roadmap.

Market internals weakened considerably by the close: more than 8,200 stocks declined, only 1,584 advanced, and over half hit new lows. Just 26.6% of S&P 500 components remained above their 50-day moving averages, reflecting deteriorating breadth and sentiment.

Looking ahead, the Federal Reserve's policy meeting next week is in focus. While rates are expected to remain unchanged, any updates to economic projections or Chair Jerome Powell’s tone could be pivotal—especially now that geopolitical instability has entered the mix.