The S&P 500 slipped for a second consecutive session, with escalating Middle East tensions pushing oil prices higher and amplifying worries about inflation. Brent crude futures climbed for a third straight day, nearing seven-week highs after the U.S. struck an Iranian oil export hub on Kharg Island and tankers near the port city of Jask. Meanwhile, Iran's Revolutionary Guard warned that crew members on tankers near Kuwait and Bahrain should abandon their vessels, signaling they could become targets.

Chris Larkin, a strategist at Morgan Stanley's E*Trade unit, noted that with geopolitical tensions driving crude prices upward, investors may find it difficult to shift their focus away from inflation concerns. All eyes now turn to Friday's U.S. consumer price index report, which could be pivotal in determining whether the Federal Reserve will raise interest rates this month. Futures markets are currently pricing in nearly a 60% probability of a rate hike at next week's central bank meeting.

In the tech sector, the Philadelphia Semiconductor Index extended its winning streak to four days, boosted by a surge in Intel Corp (NASDAQ: INTC), which jumped more than 9% following a DigiTimes report suggesting the chipmaker may raise CPU prices. Qualcomm Inc (NASDAQ: QCOM) also gained over 3% after the smartphone chip giant secured an order to supply custom AI chips for Amazon.com Inc (NASDAQ: AMZN)'s cloud division.

At the close in New York, the S&P 500 fell 0.58% to 7,673.52 points. The Dow Jones Industrial Average declined 1.18% to 52,786.07, while the Nasdaq Composite shed 0.32% to 26,421.41. The Nasdaq 100 edged down 0.12% to 29,507.7, and the small-cap Russell 2000 slipped 0.52% to 2,960.204.