High oil prices knock down stocks and erase Wall Street’s hopes for a cut to interest rates

Oil Price Surge Rattles Markets as Fed Rate Cut Hopes Fade

Stock markets tumbled Friday as oil prices climbed higher, dashing investor hopes for potential Federal Reserve interest rate cuts this year. The S&P 500 fell 1.5%, marking its fourth consecutive week of losses, the longest such streak in a year. The Dow Jones Industrial Average dropped 443 points (1%), while the Nasdaq composite declined by 2%.

Oil prices accelerated in the afternoon, with Brent crude, the international benchmark, rising 3.3% to settle at $112.19 per barrel. U.S. benchmark crude gained 2.3%, reaching $98.32 per barrel. The persistent elevation in energy prices has significantly altered market expectations around monetary policy.

Bond yields jumped sharply as investors grew increasingly concerned that the ongoing conflict with Iran would cause a sustained spike in oil and natural gas prices, potentially worsening inflation. The yield on the 10-year Treasury climbed to 4.38%, up from 4.25% the previous day and 3.97% before the war began – a substantial move in bond market terms. The two-year Treasury yield, which more closely reflects Fed rate expectations, increased to 3.88% from 3.79%.

Market sentiment has shifted dramatically, with traders now having canceled nearly all bets that the Federal Reserve might cut interest rates in 2024, according to CME Group data. Some traders have even begun pricing in the possibility of rate hikes in 2026, a scenario that seemed implausible before the conflict erupted.

“I think it would be market shaking,” said Ann Miletti, head of equity investments at Allspring Global Investments, regarding a potential rate hike. However, she noted that sustained high oil prices would likely drag so much on economic growth that the Fed would be unlikely to raise rates further.

Prior to the war, investors had widely anticipated at least two Fed rate cuts this year, expectations that President Trump had vocally supported. Lower rates would typically boost economic activity and asset prices, but they risk exacerbating inflation in the current environment.

The shift away from rate cut expectations extends beyond the U.S. Central banks in Europe, Japan, and the United Kingdom all maintained steady interest rates in the past week, reflecting similar concerns about inflation risks.

Brent crude prices have experienced significant volatility since the conflict began, rising from approximately $70 per barrel before the war to as high as $119.50 this week. These fluctuations have occurred hour by hour as markets attempt to assess the war’s potential duration and impact on oil and gas production in the strategically crucial Persian Gulf region.

While U.S. stock markets have historically rebounded relatively quickly from Middle Eastern conflicts, sustained high oil prices could change that pattern. “Oil prices aren’t at a red-flag point yet, but we’re getting close if the duration is long enough,” Miletti cautioned. “If three months from now, we’re in a similar situation, not only myself but a lot of other investors will be much more cautious.”

Among individual stocks, Super Micro Computer plunged 33.3% after the U.S. government accused a senior vice president and two others affiliated with the company of conspiring to smuggle billions of dollars worth of computer servers containing advanced Nvidia chips to China. The company stated it has been cooperating with the investigation and placed the accused employees on administrative leave.

Approximately three-quarters of S&P 500 companies declined Friday. Small-cap stocks, which are particularly sensitive to interest rate fluctuations, led the downturn, with the Russell 2000 index dropping 2.3%. One of the few gainers was FedEx, rising 0.8% after reporting quarterly profits that significantly exceeded analyst expectations.

Gold, typically considered a safe-haven asset during uncertain times, closed at $4,574.90 per ounce, underperforming despite geopolitical tensions. Earlier this year, gold had set records, briefly exceeding $5,400 per ounce. The metal’s appeal diminishes when bond yields rise, as investors can receive guaranteed interest payments from fixed-income investments.

European stock markets also recorded sharp declines, continuing their significant losses from Thursday, while Asian markets showed mixed performance, with Chinese indices falling while South Korea’s Kospi managed a modest 0.3% gain.