By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Escalating tensions in the Middle East have dampened investor confidence and raised concerns about how riskier assets, including the highly valued U.S. stock market, might respond if the situation worsens.

Stocks tumbled on Tuesday as investors rushed to safe-haven assets such as Treasuries and the dollar after Iran launched ballistic missiles at Israel. Iran claimed the attack was in retaliation against Israel’s operations against Hezbollah in Lebanon, while Israel warned of serious consequences.

The S&P 500 fell as much as 1.4% but later closed down 0.9%. Meanwhile, the Nasdaq Composite Index dropped 2.3% before finishing 1.5% lower. Popular safe-haven investments, including gold and the dollar, saw heavy buying activity.

Previous geopolitical tensions, like Russia’s invasion of Ukraine in 2022, caused quick but brief market shifts toward safer assets like gold and the dollar.

Current market reactions may hinge on Israel’s response and the potential escalation between Iran and Israel, according to investors. Hasnain Malik, head of emerging markets equity strategy at Tellimer, noted that the market is highly sensitive to worsened scenarios.

A previous round of Iranian missiles fired at Israel in April was intercepted with U.S. military support, preventing wider escalation despite initial stock sell-offs that rebounded quickly.

Investors are particularly concerned about oil prices, which spiked on Tuesday. Fears of supply disruptions in the Gulf could lead to higher crude prices, especially if the conflict escalates further, as noted by Quincy Krosby, chief global strategist for LPL Financial.

Apart from Middle Eastern tensions, upcoming catalysts for market volatility include the U.S. elections in November and a crucial jobs report this week influencing the Federal Reserve’s policies.

The Cboe Volatility Index, an indicator of demand for market protection, rose to a three-week high before slightly retreating, suggesting moderate concern among investors.

Pricing on SPDR S&P 500 Trust ETF options expiring on Nov. 8 indicates expectations of significant market activity around the U.S. elections.

Traders are also focused on the upcoming payroll report, with options indicating a potential 1.1% swing on the day, reflecting worries about possible surprises in the unemployment data.

For now, market participants remain uncertain whether the current fears will subside, with high sensitivity expected to geopolitical news in the near future, according to Michael Brown, senior research strategist at Pepperstone.