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Israel-Iran tensions raise concerns over potential

escalation

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S&P 500 remains near February highs but shows signs of

stagnation

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Rising oil prices spark worries about inflation and Fed

policy

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Investors look to upcoming U.S. economic data for market

direction

By Saqib Iqbal Ahmed

NEW YORK, June 20 (Reuters) - Investors will focus on

the Israel-Iran conflict and U.S. economic data releases next

week to assess the near-term outlook for stocks, as the S&P 500

hovers just below its February highs.

The S&P 500 has rebounded sharply from its

early-April selloff, as tariff-related tensions have eased.

However, the U.S. benchmark index appears to be taking a

breather at some 2.7% below its February closing high. The index

has gone 27 trading sessions since coming within 5% of its

February high but has not yet set a new record.

With Israel and Iran trading missiles, escalating threats of

a sweeping conflict in the Middle East sent oil prices sharply

higher and led to caution in markets.

"We're all waiting on pins and needles to see what happens

with the Israel-Iran situation," said Brian Jacobsen, chief

economist at Annex Wealth Management.

So far, the oil market has absorbed most of the impact from

geopolitical turmoil, with equities relatively stable. Yet stock

investors remain concerned that higher oil prices could stoke

inflation and upset plans for interest rate cuts from the

Federal Reserve.

On Wednesday, the Fed held rates steady and policymakers

signaled borrowing costs are still likely to fall this year. But

they estimated the overall pace of expected future rate cuts

would be slower than they saw at their March meeting. They cited

expectations that higher inflation would flow from President

Donald Trump's tariff plans.

"The question is oil prices and what that does to inflation

- which has implications for monetary policy and how long the

Fed keeps rates "meaningfully restrictive"," said Sonu Varghese,

global macro strategist at Carson Group.

The big near-term risk for equities, investors said, was if

the U.S. were to join Israel's bombing campaign against

arch-enemy Iran. Trump is keeping the world guessing whether the

U.S. would join Israel's bombardment of Iranian nuclear and

missile sites, as residents of Iran's capital Tehran streamed

out of the city on the sixth day of the air assault.

The White House said on Thursday that Trump would decide on

U.S. action in the next two weeks.

"If we were to see the U.S. enter the war or further

escalation in the attacks between the two countries, that would

give the S&P 500 and equity markets more reasons to react

negatively," said Damian McIntyre, head of multi-asset solutions

at Federated Hermes ( FHI ) in Pittsburgh.

On the other hand, a de-escalation in Middle East tensions

could prompt a relief rally for stocks.

"If both sides can kind of just slowly de-escalate, that

would be positive for equity markets, positive for risk

markets," McIntyre said.

"Markets are taking a bit of a wait-and-see approach here,"

he said.

Still, any stock market pullbacks due to rising geopolitical

tensions are likely to be fleeting, investors said.

"History says that usually military shocks are shallow and

short-lived, and so until further notice, I think that's how

Wall Street will react to this one," Sam Stovall, chief

investment strategist at CFRA Research, said.

Investors will also parse a slew of incoming data releases,

including U.S. business activity and housing sales on Monday,

consumer confidence numbers on Tuesday and the PCE Price Index

on Friday.

U.S. consumer confidence plunged in the past few months,

with households fearing tariffs could prompt a recession and

higher inflation. However, with inflation in check and the U.S.

reaching a truce in its trade fight with China, investors expect

to see a pickup in sentiment.

"Remember, the survey-based data all got crushed in the

March, April, May time frame ... my expectation is we're still

going to see an improvement," Mark Hackett, chief market

strategist at Nationwide said.