U.S. equity markets were rattled at the open Friday after news broke that Israel had launched a direct strike on Iranian targets, targeting nuclear infrastructure and military leaders. The news hit a market that had grown complacent in recent weeks, triggering a wave of risk-off selling in the first hour of trade. However, as the morning progressed, investors stepped in to buy the dip, moderating losses across major benchmarks. By midday, equities remained broadly lower, but well off their session lows, with defensive and energy sectors showing relative strength.

At the index level, the Dow Jones Industrial Average was the day’s laggard, falling 1.04% (-446 points) as rate-sensitive and multinational names were hit hardest. The S&P 500 and NASDAQ Composite both declined roughly 0.43%–0.44%, with the NASDAQ 100 falling 0.45%. Broader market indicators such as the Wilshire 5000 and Russell 3000 also fell 0.36%–0.43%, while small caps were notably weaker: the S&P 600 shed 0.82% and the Russell 2000 was down 0.79%. Microcaps were hit the hardest, down 1.16%, suggesting investors were reducing exposure to higher-risk equity segments.

Driving the early action was the geopolitical shock from Israel’s airstrike on Iran, which caused a spike in oil prices and a surge in safe-haven flows into gold and Treasuries. West Texas Intermediate crude futures jumped as much as 7.5%, peaking above $77 per barrel, their highest level since January. Meanwhile, gold futures touched a new intraday record above $3,465 per ounce, reflecting investor anxiety and inflation hedging. The CBOE Volatility Index (VIX) jumped to as high as 22 before easing back toward 19 by midday—a level still consistent with elevated but not panicked volatility.

In terms of sector performance, energy stocks surged on the back of rising oil prices. The Energy Select Sector SPDR Fund (XLE) rose nearly 1%, with names like APA Corp (+3.7%), Occidental (+3.2%), and Diamondback Energy (+3.4%) outperforming. Defense stocks also caught a strong bid, driven by the prospect of escalating conflict. Northrop Grumman (NOC) rallied 3.4%, Lockheed Martin (LMT) gained 3.6%, and RTX climbed 3.3%. Conversely, financials lagged badly, down 1.35%, as declining yields and increased uncertainty weighed on banks and brokers. Technology (-0.62%) and real estate (-0.64%) also struggled, reflecting sensitivity to interest rates and risk sentiment.

Market breadth remained negative at midday, with NYSE advancers trailing decliners by nearly 3-to-1 and similar trends seen on the NASDAQ. Volume was running slightly below average, with 297 million shares traded on the NYSE and 5.1 billion on the NASDAQ, compared to daily averages of 305 million and 5.3 billion respectively. The Value Line Average, a proxy for the average stock, was off just 0.09%, showing that losses were more concentrated in larger and higher beta names.

Specific movers included cruise lines and airlines, which came under pressure due to rising fuel cost concerns. Carnival (CCL) dropped over 5%, while United Airlines (UAL) lost more than 4%. Semiconductor names like Nvidia (NVDA) and Broadcom (AVGO) were both down over 1%, while mega-cap tech stocks including Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) saw mild pullbacks. Adobe (ADBE) fell over 6% despite strong earnings, as concerns about valuation and guidance weighed on sentiment.

The University of Michigan’s preliminary June consumer sentiment reading came in stronger than expected at 60.5 (vs. consensus 53.0), marking a sizable rebound from 52.2 in May. The report also showed a notable decline in 1-year inflation expectations, reinforcing the disinflation narrative. However, these positive data points were largely overshadowed by the geopolitical backdrop.

On the Fed front, expectations for near-term rate cuts remained largely stable. Fed fund futures priced in just a 3.1% chance of a cut in June, with the odds of a September cut holding near 73%. JPMorgan noted that they expect no action next week and anticipate the updated dot plot to project only one rate cut for 2025, reflecting the Fed’s cautious stance.

Despite the initial surge in fear, markets showed signs of resilience as the session progressed. Bitcoin, after dipping below $103,000 overnight, rebounded to trade near $104,900. The 10-year Treasury yield moved slightly higher to 4.39%, up from an earlier low of 4.32%, while the U.S. dollar index rose 0.6% to 98.50.

In summary, Friday’s midday action revealed a market grappling with a sharp geopolitical shock but unwilling to spiral into full-blown panic. Energy and defense outperformed, travel and financials lagged, and investors rotated toward safety in gold and oil while selling growth and cyclical names. Whether this marks a brief sentiment shock or the beginning of sustained volatility will depend on how the Middle East situation evolves—and how markets interpret upcoming Fed signals.