U.S. stocks came under pressure on Monday as renewed military tensions between the United States and Iran sent oil prices higher and revived concerns that inflation could force the Federal Reserve to raise interest rates again.

The Dow Jones Industrial Average fell by roughly 0.6% during Monday’s session, while the S&P 500 declined about 0.4%. The Nasdaq Composite was also trading lower, dropping around 0.3% as investors moved cautiously amid the latest geopolitical developments.

The selloff followed fresh U.S. military action against Iran, marking another escalation in a conflict that investors had hoped was beginning to cool.

Oil markets reacted quickly.

Brent crude climbed above $90 per barrel during the session, while U.S. West Texas Intermediate crude moved above $85 per barrel as traders priced in the possibility of disruptions to global oil supplies.

The Strait of Hormuz remains a major concern for markets because a significant share of the world's oil supply passes through the strategic waterway.

For investors, the biggest issue is not only the geopolitical risk itself but what higher oil prices could mean for inflation.

Interest Rate Expectations Shift Again

The latest surge in crude prices comes at a difficult time for the Federal Reserve.

Fed Chair Kevin Warsh recently warned that inflation remains too high and suggested the central bank still has work to do to bring price pressures back under control.

Those comments, combined with the jump in oil prices, have pushed investors to increase their expectations for another interest rate hike.

Markets were pricing in roughly a 60% to 66% probability of the Federal Reserve raising interest rates by 25 basis points at its September meeting, significantly higher than expectations just days earlier.

That shift matters for stocks because higher interest rates generally increase borrowing costs for businesses and reduce the attractiveness of expensive growth stocks.

Technology companies are often particularly sensitive to changes in interest-rate expectations.

Energy Stocks Buck the Market Trend

While most areas of the stock market struggled on Monday, energy companies benefited from the rise in crude oil prices.

Energy was one of the few sectors trading higher as investors moved toward companies that could benefit from stronger oil and gas prices.

Companies including Halliburton and Valero Energy were among the stocks receiving support from the rally in crude.

Utilities, communication services, industrials and real estate were among the weaker areas of the market.

PG&E shares also came under significant pressure amid concerns surrounding potential wildfire liabilities.

Meanwhile, some semiconductor stocks, including Nvidia and Qualcomm, managed to show relative strength despite the broader weakness in the market.

Stocks Still Heading for Monthly Gains

Despite Monday's decline, August has generally been a positive month for U.S. equities.

The Dow, S&P 500 and Nasdaq were all still positioned to finish the month higher, supported largely by strong corporate earnings and continued enthusiasm around artificial intelligence.

Technology stocks have been one of the major drivers of the market's performance this year.

Nvidia's latest earnings and revenue outlook recently gave the AI trade another boost, helping reinforce investor confidence that spending on artificial intelligence infrastructure remains strong.

However, Monday's market reaction shows how quickly investor sentiment can change when inflation, interest rates and geopolitical risks return to focus.

What Investors Are Watching Next

Attention is now likely to shift toward upcoming U.S. labour market data, particularly the monthly jobs report expected later this week.

A stronger-than-expected labour market could strengthen the Federal Reserve's case for another rate hike.

On the other hand, signs that employment growth is slowing could reduce some of the pressure on policymakers to tighten monetary policy further.

For investors, the next few weeks could therefore revolve around three major factors: oil prices, the conflict involving Iran and the Federal Reserve's September interest-rate decision.

The market may have enjoyed strong momentum throughout much of August, but renewed geopolitical tensions have reminded investors that inflation and interest rates remain important risks heading into September.