The stock market opens a shortened trading week under the shadow of escalating Middle East tensions following Israel's attack on Iran's nuclear, missile and military complex early Friday. Oil prices soared and stocks sank Friday after Israel launched strikes on nuclear and military sites in Iran, stoking fears of a full-blown war. The S&P 500 ($SPX) (SPY) faces a critical Federal Reserve policy decision on Wednesday amid heightened geopolitical uncertainty and key economic data that could reshape market expectations for interest rates and economic growth.

Here are 5 things to watch this week in the Market.

Geopolitical Risk Premium

The escalating Iran-Israel conflict that began Friday with Israel's attack on Iran's capital that targeted the country's nuclear program and killed at least two top military officers has fundamentally altered the risk landscape for global markets. Oil prices soared on Friday as tensions in the Middle East flared, with West Texas Intermediate crude oil futures up nearly 7% to around $73 per barrel, while energy and defense sectors saw significant gains. Nuclear energy stocks and traditional oil companies that surged on Friday may continue experiencing volatility as investors assess the conflict's duration and potential for broader regional escalation. The situation creates a complex backdrop for risk assets, with safe-haven flows likely supporting gold, Treasury bonds, and defensive sectors while pressuring growth-oriented equities. Companies with Middle East exposure or energy-intensive operations could face heightened scrutiny, while defense contractors and alternative energy providers may benefit from increased strategic investment focus. The ongoing uncertainty adds another layer of complexity to Fed policy considerations and could influence Wednesday's decision-making process.

Fed Policy Decision Under Pressure

Wednesday's Federal Reserve interest rate decision at 2pm, followed by updated economic projections and Chair Powell's press conference at 2:30pm, takes on heightened significance amid geopolitical turmoil and persistent economic uncertainties. While no rate change is widely expected, the Fed's assessment of how Middle East tensions might impact inflation through energy prices and economic growth will be closely scrutinized. The updated economic projections will provide crucial insights into officials' views on the inflation trajectory and employment outlook, particularly important given recent mixed economic signals. Powell's commentary on geopolitical risks and their potential economic implications could significantly influence market expectations for future policy moves. The Fed's traditional focus on domestic economic conditions may be tested by the need to consider global stability factors, creating potential for increased policy uncertainty. Rate-sensitive sectors including technology, utilities, and financials could experience pronounced volatility based on any shifts in the Fed's tone or timeline for future policy adjustments.

Consumer Spending Reality Check

Tuesday's retail sales data at 8:30am will provide insights into consumer behavior amid rising geopolitical tensions and persistent inflation pressures. The May retail sales figures, including the core reading that excludes volatile categories, will help assess whether household spending momentum remains intact despite recent market volatility and economic uncertainties. This data takes on particular importance given its timing ahead of the Fed decision, potentially influencing policymakers' assessment of economic resilience. Consumer discretionary companies and retailers will be closely watched for how broader spending trends might affect their operations and outlook. The report's details across different categories will help identify whether consumers are shifting spending patterns in response to economic or geopolitical concerns. With consumer spending representing the largest component of economic activity, this data could significantly influence market sentiment and sector rotation strategies, particularly if results deviate meaningfully from expectations.

Energy Market Dynamics and Economic Implications

Wednesday's crude oil inventories report at 10:30am arrives at a key moment as markets assess the energy supply implications of Middle East conflict alongside seasonal demand patterns. Following Friday's dramatic oil price surge, this data will provide insights into whether supply concerns are reflected in actual inventory changes or primarily driven by risk premium adjustments. The report's timing, just hours before the Fed decision, creates potential for energy market movements to influence monetary policy considerations, particularly regarding inflation implications. Energy sector companies that saw significant gains Friday may continue experiencing volatility based on evolving geopolitical developments and supply-demand fundamentals. The intersection of geopolitical risk and traditional energy market factors adds complexity to interpreting this data, with implications extending beyond energy stocks to transportation, manufacturing, and consumer sectors sensitive to fuel costs. Airlines, trucking companies, and chemical manufacturers could see notable reactions based on sustained energy price movements.

Economic Data Convergence

The week's economic calendar provides multiple perspectives on business and labor market conditions despite the Juneteenth holiday shortening Thursday's trading session. Wednesday's initial jobless claims at 8:30am will offer timely insights into labor market stability amid increased economic uncertainty, while Thursday's claims data provides additional confirmation of employment trends. Friday's Philadelphia Fed Manufacturing Index for June will close the week with regional business activity insights, particularly important for assessing how geopolitical developments might be affecting manufacturing sentiment and production plans. The compressed trading schedule due to the Juneteenth holiday could amplify volatility around these releases as market participants digest multiple data points in a shortened timeframe. Manufacturing companies and employment-sensitive sectors could see heightened reactions to these reports, especially if they suggest changing business conditions in response to recent developments. The combination of employment, manufacturing, and Fed policy data creates potential for significant market moves if economic indicators either support or challenge current assessments of economic resilience.

Best of luck this week and don't forget to check out my daily options article.