S&P 500 futures drop over 2% amid Middle East tensions and soaring Oil prices

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S&P 500 futures plummeted nearly 2.5% during the Asian session on Monday as worries about the effects of a protracted Middle East war on Crude Oil prices and the global economy continue to weigh on investors' sentiment.

S&P 500 futures open with a bearish gap on Monday amid concerns about a prolonged war in the Middle East.
Iran named Mojtaba Khamenei as the new Supreme Leader, raising the risk of a further escalation of tensions.
A massive rally in Oil prices fuels inflation concerns and further tempers investors' appetite for riskier assets.

The joint US-Israeli campaign against Iran enters its tenth day, with no signs of an end to hostilities. Moreover, Iran named Mojtaba Khamenei as the new Supreme Leader just over a week after Ayatollah Ali Khamenei was killed in US-Israeli strikes, signaling hardliners remain firmly in charge. Investors are bracing for a long stretch of war as the move is a direct rebuke to US President Donald Trump, who had declared the son "unacceptable".

Meanwhile, tankers are still not daring to cross the Strait of Hormuz, fueling concerns over supply disruptions and triggering a massive rally of over 25% in Crude Oil prices. This raises the risk of energy-driven inflation, which could result in a more hawkish tilt from major central banks, including the US Federal Reserve (Fed). Adding to this, higher oil prices could disrupt economic activity, further tempering investors' appetite for riskier assets.

Traders now look forward to this week's release of the latest US consumer inflation figures for more cues about the Fed's rate-cut path. The focus, however, will remain glued to geopolitical developments, which will continue to play a key role in influencing the broader market risk sentiment.

S&P 500 FAQs

What is the S&P 500?

The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.

How are companies chosen to be included in the S&P 500?

Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.

How can I trade the S&P 500?

There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.

What factors drive the S&P 500?

Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.