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Markets Drop on Tax Bill Fears and Rising Geopolitical Risk

U.S. stock markets closed sharply lower on Wednesday, May 21, as investor sentiment was shaken by rising Treasury yields, fiscal anxiety, and mounting geopolitical tensions. The focus of Wall Street was firmly fixed on a controversial tax relief bill proposed by President Donald Trump, which triggered new fears about the trajectory of the U.S. national debt.

Wall Street Ends in the Red Amid Fiscal Debate

The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all ended the session in negative territory. Market volatility picked up as traders reacted to ongoing political negotiations over a major tax legislation package that aims to deliver significant cuts, particularly in high-tax U.S. states.

According to Bloomberg, Republican lawmakers reached a preliminary agreement on Wednesday to raise the cap on state and local tax (SALT) deductions—a move designed to appeal to voters in wealthier, high-tax regions such as California, New York, and New Jersey. While politically strategic, the concession stoked concerns on Wall Street that the measure would further widen the federal deficit, which is already projected to surpass $2.1 trillion in 2025, according to the Congressional Budget Office.

As a result, the yield on the 10-year U.S. Treasury note surged past 4.60%, reaching its highest level in over a month. The jump in yields reflected investors’ expectations that the U.S. government will need to issue more debt at higher rates—exacerbating the burden of interest payments and crowding out private investment.

Geopolitical Tensions Push Oil Higher, Drive Demand for Safe Havens

Investor unease was further compounded by breaking news from CNN that Israeli defense forces may be preparing preemptive strikes on Iranian nuclear facilities in response to recent developments in the region. Although the report has not been confirmed officially, the mere possibility of renewed military conflict in the Middle East rattled markets.

Crude oil prices jumped by more than 3%, with Brent crude briefly crossing the $90 per barrel threshold, as markets priced in potential supply disruptions. Meanwhile, demand for traditional safe-haven assets such as gold and the U.S. dollar increased, signaling a flight to safety amid rising geopolitical uncertainty.

Analysts See Fed Easing as a Potential Market Cushion

Despite the day’s losses, analysts at Morgan Stanley maintained a cautiously optimistic outlook for the broader market. In a note to clients, the investment bank argued that the prospect of interest rate cuts by the Federal Reserve later in 2025 remains a key supportive factor. With inflation indicators showing signs of stabilization, the Fed may find room to begin easing monetary policy in the second half of the year.

Morgan Stanley also downplayed the immediate risk of a U.S. recession, citing continued resilience in consumer spending and corporate earnings. “The equity market is adjusting to a new fiscal reality, but there is still a strong macroeconomic foundation supporting valuations,” the analysts wrote.

Looking Ahead

Investors are now awaiting additional data that could influence monetary and fiscal policy expectations, including the latest weekly jobless claims, PMI readings, and comments from Federal Reserve officials scheduled for later this week. Meanwhile, markets will remain sensitive to developments in Washington, particularly whether the tax bill moves forward or faces opposition from fiscal conservatives concerned about long-term debt sustainability.

Geopolitical news will also be closely watched, especially as tensions between Israel and Iran escalate and global energy markets remain on edge.