The escalation script stopped working today.
President Trump said Tuesday that Iran shot down a U.S. Army Apache helicopter patrolling the Strait of Hormuz on Monday evening, and that the United States would respond. Both pilots were recovered unharmed by an unmanned sea drone, the first rescue of its kind carried out by the U.S. military. By 5 p.m. ET, Central Command said strikes on Iran had begun, describing them as a proportional response. Iran has not acknowledged responsibility for the downing.
The S&P 500 dropped more than 2% on the headlines, then spent the afternoon climbing back. It closed at 7,386.65, down 0.26%. The Dow added 86 points to finish at 50,872.11, and the Russell 2000 ended up about a quarter of a percent after being down more than 2% at the lows.
Nine of the index's 11 sectors closed higher. Technology and energy were the only two in the red, and the tech weakness was a continuation of the chip unwind we covered at midday, not the war.
Oil traded the deal, not the war
Crude was the bigger tell. WTI fell roughly 4% intraday to around $88 per barrel, with Brent near $93, even as the helicopter story dominated headlines. Traders put more weight on reported progress toward a deal to reopen Hormuz than on a downed U.S. aircraft. We covered the overnight reversal this morning, and the selling continued straight through the escalation.
Energy stocks followed the barrel. The Energy Select Sector SPDR Fund lost 1.6% on a day most of the market rose. The fund still sits about 14% above its 200-day average after the spring run, which is the point: there is a lot of disruption premium left to come out if a deal actually lands. Energy holders should watch how crude behaves now that missiles are flying again. In the first hours after the strikes began, WTI added less than 1% to around $89. That is a measured reaction, not a panic.
The defense trade is quietly fading
Defense names caught a bid on the escalation risk, but the size of the bid is the story. Lockheed Martin rose 1.9% to $530.13 and still trades 23% below its 52-week high of $692, at about 25 times trailing earnings with a 2.6% dividend yield. Northrop Grumman gained 1.5% and sits 29% below its high, below its own 200-day average, at 17 times trailing earnings and roughly 12 times EV/EBITDA. RTX added 1.6% and is 15% off its high.
The less obvious name tells the same story. Huntington Ingalls, the $12 billion builder of Navy aircraft carriers and submarines, climbed 1.8% but trades 35% below its 52-week high, at 19 times trailing earnings and around 11 times free cash flow.
Every one of these stocks peaked weeks ago while the conflict was still active. A shooting-war headline now buys the group a one-day pop of 1% to 2%, not a re-rating. The market is saying it expects this conflict to end, and that defense budgets, not nightly strike footage, will set the next move. The level to watch is the 50-day average on Lockheed and Northrop. Both closed below it today even after the pop, and a Hormuz deal would likely pull the group lower still.
CPI lands before the next strike assessment
Futures slipped modestly in the first hours after Central Command's announcement, in line with the muted oil reaction. The bigger event is already on the calendar: May CPI hits at 8:30 a.m. Wednesday, with consensus at 4.2% headline and 2.9% core, less than a week before the Fed's June 16-17 meeting. If crude holds in the high $80s, the fuel-driven part of the inflation story starts cooling just as the Fed sits down. Oracle reports after Wednesday's close, and SpaceX prices its IPO Thursday evening. The tape just told you it can absorb a war headline. Wednesday tests whether it can absorb a hot inflation print in the same week.
