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

Amid ongoing conflicts in the Middle East, Wall Street is increasingly focused on rising oil prices, viewing them as a primary 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 war has caused “the largest supply disruption in global oil markets in history.” 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 in this situation.”

Meanwhile, prices for gasoline, diesel, and jet fuel are soaring, putting significant pressure on consumers and businesses. With oil prices more than $25 above pre-war levels, Wall Street has now 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, Managing Director of Global Equity Derivatives 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, the market had already anticipated a decline in inflation outlook, 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 again approached 5%, 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 uncertainty over oil transportation through the Strait of Hormuz “could either accelerate or suppress risk appetite.”

Michael O’Rourke, Chief Market Strategist at JonesTrading, stated, “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 is the current market driver.”

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

“People are selling smaller mid-cap stocks and shifting into large tech stocks, which is why they can still hold on, but no one is truly reducing risk,” he added.

Tom Lee, co-founder and Head of Research at Fundstrat Global Advisors, known as a “Wall Street wizard,” remains optimistic that the US stock market could 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 that the market environment in 2026 will be “generally more challenging,” predicting an initial rally, followed by a decline, and a strong rebound by the end of the year.

(Source: Caixin Global)