Stock Markets React to Rising Crude Prices and Inflation Fears

The US stock market indices settled lower on Thursday, with the S&P 500 and Nasdaq 100 falling to 2-week lows and the Dow Jones Industrial Average falling to a 2.5-week low. The S&P 500 Index closed down by -0.87%, the Dow Jones Industrial Average closed down by -1.32%, and the Nasdaq 100 Index closed down by -0.72%.

Stocks were under pressure on Thursday as rising oil prices boosted inflation risks and pushed bond yields higher. WTI crude oil climbed to a 1-month high on Thursday after President Trump threatened Iran with economic isolation, dimming prospects for both an imminent breakthrough in the war between Iran and the US and a normalization of crude flows through the Strait of Hormuz.

WTI Crude Oil Prices Reach a 1-Month High

WTI crude oil prices rose more than +2% on Thursday to a 1-month high after President Trump threatened Iran and its trading partners with economic isolation. Mr. Trump said any country that allows its financial institutions, businesses, airports, or government entities to provide any type of lifeline to Iran will itself face tremendous consequences.

The 10-year T-note yield rose +4.5 bp to 4.682% on Thursday, as investors weighed the impact of rising crude oil prices on inflation expectations. The 10-year breakeven inflation rate rose to a 2.25-month high of 2.355% on Thursday, further boosting inflation risks.

US Economic News Supports Stocks Despite Inflation Fears

Thursday’s US economic news was better than expected, supporting stocks despite inflation fears. Weekly initial unemployment claims unexpectedly fell -6,000 to 206,000, showing a stronger labor market than expectations of an increase to 210,000.

The Aug Philadelphia Fed business outlook survey unexpectedly rose +6.0 to a 5.25-year high of 47.4, stronger than expectations of a decline to 24.8. In addition, July leading indicators rose +0.2% m/m, stronger than expectations of +0.1% m/m.

Market Outlook for Strong Q2 Earnings Remains Bullish

The outlook for strong Q2 earnings remains bullish, with the S&P 500 tracking for earnings growth of almost 32% in Q2, well above projections of +23%. AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500’s earnings-per-share growth in Q2.

So far, earnings results have been positive, with 86% of the 465 S&P 500 companies that have reported Q2 earnings beating estimates, according to Bloomberg data.

Cryptocurrency-Exposed Stocks Extend Gains Amid Rising Oil Prices

Cryptocurrency-exposed stocks extended Wednesday’s sharp gains on Thursday, as Bitcoin (^BTCUSD) rose more than +5% to a 2.5-month high. MARA Holdings (MARA) closed up more than +15%, and Riot Platforms (RIOT) closed up more than +8%.

Also, Strategy (MSTR) closed up more than +7% to lead gainers in the Nasdaq 100, and Coinbase Global (COIN) and Galaxy Digital Holdings (GLXY) closed up more than +7%.

In addition, Circle Internet Group (CRCL) closed up more than +6%.