Crude Crosswinds: Stocks Follow Oil Up, Then Down

Rising Oil, Lack of War Progress Sends Stocks Lower

By Joe Mazzola

The rally paused early Monday after six straight weeks of gains. Though major indexes didn't stumble much, the Persian Gulf impasse shows no signs of ending after the U.S. rejected Iran's terms late Sunday. Crude oil rose 3% to near $100 per barrel in the U.S., where gas now averages $4.50 per gallon heading into key inflation reports data. This week also includes President Trump's trip to China to talk with President Xi, where technology and rare earths could be among the topics.

Considering all the record highs despite lack of progress toward peace, lofty oil, and signs of concentration in tech, it's tough to say whether the market has grown complacent. "The global economy is experiencing the largest CapEx boom in history, and earnings estimates continue to be revised higher," said Nathan Peterson director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR) in his Weekly Trader's Outlook. "The bullish momentum can persist longer than most investors think, and as long as dip buyers get rewarded with higher prices, it can reinforce the dip buying behavior."

Back on Friday, stocks rose after April jobs gains almost doubled expectations at 115,000 and unemployment stayed at 4.3%. Even so, the tech-heavy Nasdaq Composite's gains doubled those of the broader S&P 500 Index. For the week, the Nasdaq's 4.5% gain compared with 2.3% for the S&P 500. "The driving engine behind last week's push higher in stocks continued to be the AI infrastructure plays, especially in the chip stocks," Peterson said, noting that Advanced Micro Devices' (AMD) upward revision for long-term growth helped fuel bullish momentum in the semiconductor space.

Three things to watch

On the block: Several Treasury auctions this week could affect yields, starting with a 3-year note auction this morning and a 10-year note one tomorrow. Results are usually available before the close of trading on Wall Street. Recent auctions saw lax demand, and more of the same could send yields higher. That, in turn, could pressure rate-sensitive small-cap stocks and home builders. Crude also remains a big driver for yields. Higher oil generally has sent yields up, and vice versa. Still, the benchmark 10-year Treasury note yield has traded in a tight range between roughly 4.2% and 4.45% for eight weeks now, which it stayed in this morning despite the oil move. "We're not expecting them to go significantly higher from here," said Collin Martin, head of fixed income research and strategy at SCFR. "We don't really expect them to retest the 5% level we saw with the 10-year back in 2023."
Earnings pace slows after impressive start: First quarter S&P 500 earnings per share growth is nearly 28% on a blended basis—meaning combined growth for companies reporting already and estimates for those to come—FactSet said Friday. Most of the mega-cap tech firms boosting that number have already reported, though Nvidia (NVDA) looms on May 20. Retailer earnings dominate later this month, and their lower margins may reduce the overall figure. Still, many analysts now look for stronger earnings growth in coming quarters, piggybacking off first quarter strength. Analysts now expect nearly 20% annual second quarter S&P 500 earnings growth. AI and tech companies have dominated in terms of positive revisions to earnings growth, not just for the first quarter, but for the full calendar year. However, there's concentration concern as three companies alone—Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META)—explain about 70% in dollar terms the increased earnings expectation for the entire year. The concentration risk also shows up in market breadth, as only 52% of S&P 500 stocks traded above their 50-day moving averages as of Friday. Tech did most of the heavy lifting.
Jobs report brings 1960's nostalgia: Last Friday's jobs report showed Federal government positions falling to the lowest point since May 1966, the month when the Beatles released a song about a man who wanted to be a "Paperback Writer." That particular job category isn't tracked by nonfarm payrolls. Wages aren't going back to 1966 levels, but at growth of just 0.2% in both March and April, recent weakness in pay could ease inflation concerns. Job categories with the most growth, including retail and healthcare, aren't traditionally high paying. There was almost no change in business and professional, financial activities, or construction growth last month—categories that tend to pay more. "Friday's payrolls report surprised to the upside which bolsters the case that the labor market is showing signs of stabilization," said Cooper Howard, director of fixed income research and strategy at SCFR. Longer-term interest rates could remain elevated, he added, due to the stabilizing jobs market and inflation, and the Federal Reserve seems likely to stay on hold despite the expected Senate approval this week of chairman nominee Kevin Warsh, who's advocated for lower rates.

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