Wall Street has opened the week in full risk-off mode, and the trigger sits several thousand miles from any trading floor.

The S&P 500 opened sharply lower on Tuesday 3 March and slid more than 2% shortly after the bell, extending a brutal selloff that began late last week when the United States and Israel launched coordinated strikes against Iranian targets on 28 February. Iran’s supreme leader and several senior military commanders were killed in the strikes, and Iranian forces have retaliated against Israel and US bases across the Gulf.

Markets are not pricing a headline. They are pricing an open-ended conflict in the region that supplies a fifth of the world’s oil.

Why This Is Not a Normal Geopolitical Selloff

Equity markets usually absorb geopolitical shocks quickly. The historical pattern is well documented: an initial drop, a few sessions of elevated volatility, then a recovery as investors conclude the event has no lasting effect on corporate earnings.

That pattern holds when the conflict does not touch the inputs of the global economy. This one does. The strikes and the retaliation have put the Strait of Hormuz — the chokepoint through which a substantial share of seaborne crude and LNG passes — directly in play. Any sustained disruption there does not merely frighten investors; it raises the input cost of nearly every business on the index.

That is the difference between a headline and a shock. A headline moves sentiment. A shock moves earnings.

The Safe-Haven Trade Is Behaving Strangely

Gold surged above $5,400 an ounce on Monday 2 March as capital fled into hard assets, a record run driven by exactly the panic buying you would expect.

What followed is more instructive. Gold did not hold those levels. It has since given back a large portion of the move as investors rotated toward the one asset that outranks gold in a genuine liquidity scramble: the US dollar.

This is a recurring feature of crisis markets that catches traders out. In the first hours of a shock, capital buys protection. In the days that follow, it buys liquidity — and nothing is more liquid than the dollar. Traders who bought gold expecting a straight line higher have been squeezed by a dollar bid that arrived second but hit harder.

What Happens to Earnings

The mechanism that turns an oil shock into an equity selloff runs through two channels, and they compound.

The first is margins. Energy is an input cost for transport, manufacturing, chemicals, agriculture and retail logistics. When crude rises sharply, those costs land in the following quarter’s results whether or not demand holds up.

The second is the discount rate. Higher energy prices feed headline inflation. Higher inflation reduces the odds that a central bank eases, and may force it to tighten. A higher discount rate compresses the multiple investors will pay for future earnings.

Equities therefore get hit from both directions at once: lower expected earnings and a lower multiple applied to them. That is why an oil shock is one of the few events capable of producing a sustained equity drawdown rather than a two-day dip.

The Fed Problem

The policy implication is uncomfortable. A central bank facing an energy-driven inflation shock has no good options.

Cutting rates to support growth risks letting inflation expectations unanchor. Holding or hiking into a supply shock tightens conditions onto an economy already absorbing higher input costs. The textbook advice is to look through supply-driven inflation on the assumption it is transitory — but that advice depends entirely on the supply disruption actually being temporary, and nobody currently knows how long the Strait stays contested.

Traders who spent the start of the year positioned for policy easing should treat that assumption as suspended rather than merely delayed.

How to Handle a Market Like This

Volatility regimes change position sizing, not just direction. A stop distance that was appropriate in February is too tight for a market moving 2% before lunch. If you keep your usual stop, you keep getting stopped out. If you widen the stop without cutting size, you have quietly doubled your risk. Widen the stop and cut the size.

Correlations converge in a crisis. Positions that looked diversified in January are now expressions of the same trade — long risk, short oil, short volatility. Check what you actually own rather than what your sector labels say you own.

Do not fade a supply shock on valuation. “This has fallen enough” is not analysis while the underlying disruption is still active and unresolved.

Watch the Strait, not the index. The equity market is a lagging read on this conflict. Shipping traffic through Hormuz, tanker insurance rates and crude spreads will move first.

For traders reassessing risk management in a higher-volatility regime, our trading guides cover position sizing and stop placement in detail.

The Bottom Line

This is not a headline-driven wobble. It is a supply shock landing on a market that entered the year expensively valued and positioned for policy easing. Both of those assumptions are now under review, and until the situation in the Gulf stabilises, the market will keep repricing.

Figures cited are as of 3 March 2026. Market data moves quickly; verify current levels before trading. This article is general information, not personal financial advice.