US economic outlook downgraded amid Middle East tensions

Investment banks and financial markets are increasingly downgrading their outlook for the US economy, as rising geopolitical tensions in the Middle East drive up energy prices and heighten global uncertainty.

Recent escalation of conflict, instigated by the joint US-Israeli forces, involving Iran, has pushed crude oil prices above $100 per barrel, fueling concerns about supply disruptions and renewed inflationary pressure. Higher energy costs are beginning to reshape expectations for the economic growth, monetary policy and financial markets in the United States.

At the same time, the latest US macroeconomic paints gives a picture of rising inflation and slowing growth. US CPI was up 2.4% year-on-year in February, above the Fed's target, while the unemployment rate also rose to 4.4% from 4.3% in January, as per the US Bureau of Labour Statistics. GDP growth during Q4 2025 slowed to 1.4% on an annualized basis from 4.4% a quarter earlier, while for the full year, growth stood at 2.2%, down from 2.8% in 2024, the US Bureau of Economic Analysis said.

Several major investment banks have already revised their forecasts. Analysts at Goldman Sachs have pushed back their timeline for US Federal Reserve interest rate cuts from July to September and December, citing inflation risks linked to surging oil prices and geopolitical instability.

Financial markets have reacted with increased volatility. Global equities have come under pressure as investors reassess growth prospects, while bond yields have risen as expectations for near-term rate cuts diminish.

In the markets, the S&P 500 Index closed at 6,672.62 points on Thursday, down 103.18 points, or 1.52%. Likewise, the Dow Jones Industrial Average closed at 46,677.85 points, down 739.42 points, or 1.56%. Meanwhile, the Nasdaq Composite Index closed at 22,311.98 points, down 404.15 points, or 1.78%.

The evolving situation also complicates the Fed's policy outlook. Persistent inflation driven by energy shocks may limit the central bank's ability to ease monetary policy to support economic growth.

The combination of geopolitical risk, volatile energy markets and tightening financial conditions has prompted a more cautious outlook among global investors eyeing the US economy.