By Martin Baccardax
The market has weathered higher oil prices for more than two months. That resilience may come to an end soon.
The war in Iran has not been a problem for U.S. stocks this year. The S&P 500 has gained nearly 17% since bottoming out on March 30, while the Dow Jones Industrial Average has risen 9.5%, and the Nasdaq Composite, fueled by the rebirth of the AI trade, has surged 26%
But signs of stress are beginning to show up in stocks. After falling the most since March on Friday, U.S. stocks are kicking off the new week on the downside, with a surge in global bond yields, another rise in oil prices, and deeper concerns over the fate of the astonishing tech rally heading into the back half of the month looming over investors.
The broader move in bonds, which lifted 10-year U.S. Treasury yields to as high at 4.631% in overnight trading and took 30-year paper to 5.159%, near the highest levels since 2007, was the more concerning aspect of the market's recent repricing, and suggests a decoupling from global oil prices that could test stocks over the coming weeks.
Benchmark 10-year notes last traded at 4.597%, still the highest in more than a year, after adding more than 20 basis points last week following hotter-than-expected inflation readings and another move higher in global crude prices.
Friday's move suggests that Monday's dip might not be as benign as it looks. The S&P 500 tumbled 1.24% on Friday, a day after the benchmark's relative strength index, a measure of market momentum, topped 78 point.
"Since 2003, there have only been six prior times when S&P 500 lost more than 1% immediately following an RSI of 75+," noted Jonathan Krinksy, managing director and chief market technician at BTIG.
"Average returns are negative on every timeframe from 5-40 days," he added. "Five of the six occurrences saw at least a -7% peak-to-trough decline over the ensuing weeks with the one exception ('23) trading sideways."
The rise in oil prices is contributing to the unease. Brent crude contracts for July delivery rising 0.95% to $110.30 a barrel as the war between the U.S. and Iran enters its 80th day and prospects of a lasting truce look further away than they did two weeks ago. In fact, contracts for Brent crude delivery in six months' time were rising 0.9% to $91.79 a barrel, suggesting higher crude prices are likely to remain a fixture for the global economy well into the final months of the year.
"The oil market continues to reprice ongoing supply disruptions, with last week's Trump-Xi talks yielding no tangible progress in the Middle East," said Warren Patterson, head of commodities strategy at ING.
Neil Shearing, group chief economist at Capital Economics, thinks markets could be near a tipping point if the Strait of Hormuz remains closed and supply conditions don't improve soon.
"In the absence of a deal to re-open the Strait within the next couple of weeks, we are likely to shift our forecasts towards something closer to our adverse scenario," he said.
He sees crude rising to $130 a barrel in the third quarter, absent a breakthrough in U.S.-Iran talks, with a $120 price likely holding into the end of the year.
Higher oil prices are likely to trigger a rethink of both the broader interest rate market, which is now pricing in a 50% chance of an interest-rate hike by the end of the year, and the dynamics that have underpinned the soaring stock market rally over the second quarter.
"While global equity markets have recently done a stunning job of posting a comeback from weak sentiment triggered by the war in Iran, spiking global yields nonetheless dramatically raise the risk of 'risk-off' across markets," said John Hardy, global head of macro strategy at Saxo Bank.
And that risk-off moment could hit particularly hard if tech stocks begin to feel gravity's pull. Tech unquestionably has powered the bulk of U.S. stock gains since the start of the second quarter, with an index of the Magnificent Seven megacap giants rising 22.6% and the PHLX semiconductor index powering to a staggering 52.7% advance over the same period.
"The swift rise in bond yields, if sustained, could threaten the tech sector's leadership in the stock market, especially at a time when things have been frothy," said Richard Reyle, chief investment officer at Questar Capital Partners.
Nvidia earnings later this week could be the final nail in the coffin, particularly given the stock's 31% gain since the start of the second quarter. Analysts are looking for a top line of $78.8 billion and profits of around $1.75 a share.
Anything that doesn't materially top those figures, as well as the second quarter outlook for sales of around $87.1 billion, could trigger the pullback in stocks that other markets are indicating.
June might end up being a tough month.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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May 18, 2026 10:16 ET (14:16 GMT)
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