The stock market's biggest correction risk remains tied to oil, which in has synced with moves in Treasury bond yields.
And stocks are treading water ahead of what is a key stretch of autumn-third-quarter earnings season and November midterms.
The S&P 500 has gained just 2.9% since late June and only edged into the green for this month in Monday trading. September has booked only one full month gain, in 1953, after trading in the red over the first half, data show.
So with the Fed's rate hike in the review mirror, and earnings and elections just up the road, investors are looking for an catalyst that will drive performance over the year's final months.
"Stocks are coming off a second week of navigating multiple obstacles: high oil prices and bond yields, a Fed rate hike, and renewed concerns about AI risks-without suffering too much damage," said Chris Larkin, managing director for trading and investing at E*Trade.
"Given this is the seasonally weakest period of the year, bulls may be encouraged by the fact that the S&P 500 ended last week less than 2% below its record high," he added.
Morgan Stanley's Mike Wilson, however, thinks everybody needs to be patient.
Wilson, the bank's chief U.S. equity strategist, still sees the S&P 500 reaching 8000 by year's end, a target that suggests a 4% gain from current levels.
But Wilson cautions that another leg higher in global oil prices, pushed up by the Iran war, could trigger a short but sharp correction over the coming weeks.
"Higher crude and refined product prices as the primary near-term risk along with the historical trading patterns heading into midterm elections," the strategist wrote on Monday.
"We still view [7000 points to 7100 points on the S&P 500] as a tactical downside case should these risks emerge over the next 3-5 weeks, but this would not prevent the market from reaching our year-end target even in this risk scenario," he added.
Brent crude, the global pricing benchmark, has tumbled 7.3% over the past week. Brent futures for November delivery stand at just a hair above $100 a barrel-a price that it hasn't settled below since Sept. 8.
Gasoline and diesel prices, though, are still climbing. The national average for gas is $4.48 a gallon, up more than 9% over the past month. And Diesel is at fresh record high of $6.51 a gallon, up nearly 76% from this time last year.
That said, a modest pullback in bond yields, tied to the retreat in crude prices, is providing some market support. The 10-year note is downabout 5% basis points to 4.95% and the 2-year note is trading at 4.73%.
But how long will that hold?
"This has been one confusing market," said Jay Woods, chief market strategist at Freedom Capital Markets, citing the "battleground area around 7600 points" for the S&P 500.
"The bulls will point to its strength and resiliency," he said. "They aren't wrong: this could be a new baseline from which we eventually go higher."
"The bears will argue that the more often this level gets tested the more likely it is to break," he added. "That is also true."
Woods thinks the bears may win out, as market breath narrows, inflation worries accelerate, and election headwinds mount.
"That would set us up over the coming weeks for an October low and a rally into year-end where we end up talking about the 7600 point level all over again," he concluded.
All of these movements will coincide with the fourth anniversary of the current bull market, which began when the S&P bottomed out at 3855.84 points on Oct. 11, 2022.
Stocks have gained a staggering 114% since then, powered largely by the tech sector and the launch of OpenAI's ChatGPT the following month.
And those gains have powered through "higher for longer" Fed rates, AI bubble concerns, the surge in global crude prices, and debt and deficit tallies that are testing the mettle of fixed-income investors worldwide.
"Stocks are always climbing a wall of worry and do so effectively most of the time," said Nancy Tengler, CEO of Laffer Tengler Investments. "But earnings ultimately, and eventually, drive stock price performance."
Collectively, third-quarter profits are forecast to rise 30% from last year to $768.8 billion, according to LSEG estimates. The full-year tally should reach 35%, which would be more than double 2025's total and the best annual performance since 2021.
Tengler notes that stocks are cheaper than they were at the start of the year, with the current PE ratio for the S&P 500 trading at roughly 19 times forward earnings, and profit margins-and expanding because of productivity gains.
That, she argues, points to more gains ahead.
"The current bull market ranks fifth out of the eight bull markets since 1966," Tengler added. "And no matter which period measured, it is likely this one has a ways to go."
Finishing out September, however, comes first.
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