Crude Awakening: Corporate Profits vs. Oil Pressure

U.S. stocks failed to catch a bid last week as geopolitical risks and rising rates overshadowed strong corporate earnings. The S&P 500 and Nasdaq notched their second consecutive weekly decline, slipping 0.6% and 2.1%, respectively, while the Dow rounded out the period down 0.43%, for its third straight losing week. The downward pressure on markets reflects a market caught between two narratives: cautious optimism fueled by strong earnings growth on one hand, and mounting concern over higher oil prices, rising inflation risk and the growing possibility of a rate hike on the other.

Oil is once again forcing its way into the market narrative, with front-month Brent surging roughly 10% last week to $96 per barrel, briefly topping the $100 mark. The move reflects a convergence of three separate supply shocks: the ongoing disruption of the Strait of Hormuz, new conflict to Red Sea shipping as Houthi attacks target key alternative routes, and an escalating Russia-Ukraine conflict. Markets had shown some resilience earlier in the year, with inventory drawdowns, softer Chinese demand and alternative shipping routes helping offset the worst-case scenarios many had feared. That cushion is being tested as the U.S.-Iran conflict widens, with prospects of a near-term deal fading away.

The renewed spike in energy prices is not just a headache for the consumer and energy-intensive businesses; it is also reigniting inflation concerns in the bond market. Ten-year Treasury yields rose roughly 10 basis points last week to 4.70%, marking the highest level since early 2025, while 30-year yields have pushed back toward May highs. As oil climbs, investors are once again grappling with whether the U.S. Federal Reserve (Fed) may need to respond to a fresh round of energy-driven inflation, adding another layer of uncertainty for equity valuations already under pressure from rising rates. Most notably, the two-year Treasury yield now exceeds the Fed policy rate by the widest margin in four years. This movement suggests the bond market is beginning to price in the possibility of a rate hike later this year.

The Fed meets later this week, and investors will be watching closely for any signal, as the new chairman of the central bank has offered less transparency into its thinking than markets have grown accustomed to. If the Fed chooses to hike rates, investors will be asking whether this is a temporary midcycle adjustment or a renewed tightening cycle to rein in inflation. Regardless, a more hawkish Fed is a headwind to valuations and a tailwind for volatility as the market prices in an added risk premium.

One positive investors can pound the table on is that earnings season is off to one of its stronger starts in years. The S&P 500 is about a quarter of the way through second-quarter reporting and has posted numbers well above historical norms. Of the 27% of companies that have reported so far, 86% have topped earnings estimates, comfortably ahead of the five-year average of 78% and the 10-year average of 76%. The blended earnings growth rate for the quarter has climbed to 37.9%, up from 24.8% just last week and 23.2% at the end of June, putting the index on pace for its strongest earnings growth since the third quarter of 2021. A meaningful chunk of that acceleration is due to Alphabet, whose outsized earnings-per-share beat is skewing the aggregate figures higher. Strip Alphabet out, and the growth rate settles closer to 25.9%, still an impressive number in its own right.

Revenues are telling a similarly encouraging story, with 80% of companies beating top-line estimates and the blended revenue growth rate now running at 13.2%, which would mark the best showing since the second quarter of 2022. Ten of 11 sectors are posting year-over-year earnings growth, led by energy, communication services and information technology, with health care bucking the trend. Valuations remain reasonable despite the year-to-date gains as earnings growth drives index returns. The S&P 500 forward price-to-earnings ratio now sits at 20.1, slightly above both the five- and 10-year averages. Earnings season is shaping up to be one of the best in years, with growth running at a pace not seen since the third quarter of 2021, when the index posted 40.3% growth.

As the 2026 midterms draw within three months, investor attention is likely to shift increasingly toward Washington in the weeks and months ahead. History suggests this pivot typically comes with a market that grinds sideways. Since 1974, the S&P 500 has generated a median return of 0% from the start of August through Election Day in midterm years. Policy uncertainty and equity volatility both tend to creep higher into the fall before settling down once votes are counted. Simply put, this cycle may not carry the drama some expect. Prediction markets currently put the odds of a Democratic House at roughly 85%, with the Senate closer to a coin flip. A divided Congress isn’t the worst outcome for market participants, as gridlock offers little in the way of surprises.

If anything, investors seem more focused on what this November signals for 2028 than on the immediate policy implications, with inflation, gas prices and artificial intelligence regulation shaping up as the defining issues on voters’ minds. For now, most corners of the equity market have shown little sensitivity to shifting election odds, though that relationship could tighten as Election Day draws closer and the political noise gets louder.

Looking ahead, investors will have a jam-packed week with earnings, a Fed meeting and economic updates. Investors will get a gauge on how corporate America is doing, with 177 S&P 500 companies set to report. Mega-cap companies will be in focus, with Meta, Microsoft, Apple and Amazon issuing profit updates and spending forecasts on artificial intelligence. Other notable companies set to report include Boeing, Starbucks, Coca-Cola, Ford, Mastercard, AbbVie, Qualcomm, Chipotle, Lam Research and Amphenol. Headlining the economic calendar is an update on the Fed’s preferred gauge for inflation, the Personal Consumption Expenditures (PCE) Price Index, which is expected to show a 0.1% decline month to month. Other notable reports include a durable goods update, wholesale and retail inventories, and an update on consumer confidence. Lastly, the Fed will issue its decision on interest rates Wednesday at the conclusion of its Federal Open Market Committee meeting.

Economic Calendar Week of July 27 – July 31

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5785458 – Exp. 07/31/2029