Wall Street Buzzes Over High Oil Prices "Spillover Effect": From Economy to Markets, One Trigger Moves Everything!

Caixin March 16 News (Editor: Huang Junzhi) Amid ongoing conflicts in the Middle East, Wall Street is increasingly focused on rising oil prices, viewing them as a major driver of the economy and markets.

Last week, Brent crude futures surged to $100 per barrel. The International Energy Agency (IEA) warned that the Iran conflict has caused “the largest supply disruption in the history of the global oil market.” Analysts believe that the unprecedented amount of oil released by the IEA, combined with eased sanctions on Russian oil, will help but cannot address the fundamental issue of rising oil prices.

Vikas Dwivedi, Global Energy Strategist at Macquarie Group, said, “Unless the political and military situation is quickly resolved within a few days, shortages will eventually occur.”

He added, “We do not consider it abnormal for oil prices to reach $150 under these circumstances.”

Meanwhile, prices for gasoline, diesel, and jet fuel are soaring, putting significant pressure on consumers and businesses. With oil prices over $25 above pre-war levels, Wall Street has already incorporated energy cost increases into inflation expectations, bond yields, and overall risk appetite.

“Crude oil is currently the key factor influencing market direction,” Charlie McElligott, Global Equity Derivatives Strategist at Nomura Securities, wrote in a client report.

Inflation and the Federal Reserve

McElligott noted that before the outbreak of US-Iran conflict on February 28, markets had already anticipated a decline in inflation outlooks, and until recently, the Federal Reserve had “almost entirely adopted a dovish policy stance.”

However, now Wall Street increasingly expects policymakers to keep interest rates unchanged.

Goldman Sachs previously reported that “higher inflation paths will make it more difficult for the Fed to start cutting rates soon,” pushing the first rate cut forecast from June to September, with a second cut expected in December.

Nevertheless, if the labor market weakens “faster and more severely” than expected, analysts believe inflation concerns will not prevent earlier rate cuts.

Bond Yields and the Stock Market

Expectations of rising inflation have significantly pushed up US long-term Treasury yields, as investors demand higher premiums for holding long-term bonds. The 30-year Treasury yield has approached 5% again, a level that has triggered stock market volatility multiple times in recent years.

Adam Turnquist, Chief Technical Strategist at LPL Financial, said, “Currently, oil remains the main driver of the market.” He also added that uncertainties around Strait of Hormuz oil transportation “could either accelerate or suppress risk appetite.”

Michael O’Rourke, Chief Market Strategist at JonesTrading, said, “We need to watch oil prices daily. The S&P 500 now moves inversely to oil prices every day. This isn’t really investing, but it’s what’s driving the market right now.”

Despite this, O’Rourke pointed out that although the S&P 500 has fallen over 3% since the start of the war, the market has not entered a full correction phase.

“People are selling smaller mid-cap stocks and holding onto large tech stocks, which is why they can keep their positions, but no one is truly reducing risk,” he added.

Tom Lee, co-founder and Chief Research Officer of Fundstrat Global Advisors, known as a “Wall Street oracle,” remains optimistic that the US stock market may rise in March.

He noted that the US has been a net oil exporter since 2020, so rising crude prices will directly boost the economy. Lee also pointed out that due to rising energy costs, global economic growth may slow, “which means investors will favor growth stocks, and the S&P 500 is essentially a growth index.”

However, the strategist believes the market environment will be “more challenging overall” in 2026, predicting an initial rally, followed by a decline, and a strong rebound by the end of the year.

(Caixin Huang Junzhi)