A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., Aug. 19, 2026.

Stocks dropped Tuesday to kick off a shortened week of trading, with investors monitoring escalating tensions in the Middle East ahead of a key inflation reading later this week.

The Dow Jones Industrial Average tumbled 628.18 points, or 1.18%, to 52,786.07. The 30-stock index was down for a second straight session after Friday's 272-point loss.

The S&P 500 was down by 0.58% to 7,673.52, while the Nasdaq Composite was lower by 0.32% to 26,421.41 — each also notching back-to-back losses.

U.S. markets were closed Monday for the Labor Day holiday.

Stocks came under pressure as oil prices continued to rise. West Texas Intermediate futures climbed for a sixth straight day — its longest rally since a seven-day streak back in March — after the U.S. and Iran exchanged blows over the weekend. Brent crude oil futures settled up nearly 1% at $97.92 per barrel, but climbed to $99 after the close.

The spike in energy prices sharpens investors' focus on inflation data set to release later this week, as they will likely shape expectations for monetary policy ahead of the Federal Reserve's meeting next week. The producer price index and consumer price index for August are due out Thursday and Friday, respectively.

Fed funds futures were last pricing in a 59% chance the central bank will hike rates by a quarter-percentage point after the Sept. 15-16 meeting, according to the CME Group's FedWatch tool.

"If you have a CPI reading that surprises to the upside, that's going to really make it difficult for them not to hike rates," said Mark Hackett, chief market strategist at Nationwide. "And that is effectively what investors are focused on right now."

Semiconductors were a bright spot during the session, helping to offset losses from higher oil prices. The VanEck Semiconductor ETF (SMH) gained 1.2%. Shares of Intel and Advanced Micro Devices surged 9.1% and 5.9%, respectively. Broadcom climbed 3%.

The spike in energy prices also put upward pressure on Treasury yields. The benchmark 10-year Treasury note yield last week climbed to its highest level since November 2023, while the shorter-term 2-year note yield scaled to a January 2025 high.

Traders also have to contend with renewed trade tensions between the U.S. and Canada. Retaliatory tariffs from Canada on about $20 billion of U.S. goods take effect on Tuesday. President Donald Trump on Monday said ahead of the new duties that Canadian aircraft manufacturer Bombardier can't sell in the U.S. unless Canada begins making its products in the U.S.

— CNBC's Nick Wells contributed to this report.