Stocks March On- Without Tripping on Rates or Slipping on Oil

Executive Takeaway: Despite higher interest rates and persistently elevated oil prices, the S&P 500 remains within 1% of its all-time high. Following the FOMC’s 25-basis-point rate hike, several Federal Reserve officials reinforced their hawkish stance, while manufacturing and services data came in stronger than expected. Ongoing geopolitical tension with Iran has kept WTI crude above $90 per barrel, and national diesel prices reached a record $6.50 per gallon. Meanwhile, technology leadership and a Bitcoin breakout signal that risk appetite remains firmly intact.

The 10-Year Treasury Yield Has Passed 5% — What’s Next?

The 10-year Treasury yield has climbed past 5% (testing 5.18%), driven by stronger-than-expected S&P Global manufacturing and services PMI readings, elevated oil prices, a weak 5-year Treasury auction, and persistent fiscal deficit concerns.

• Key Technical Threshold: The 10-year yield is now testing 5.18% and approaching 5.3%, a level last seen in 2007.
• Market Impact: If yields remain below 5.3%, long rates could retreat somewhat. However, a sustained break above 5.3% could spark broader market fears that yields are heading toward 6%.
• Valuation Squeeze: Higher long-term yields continue to put pressure on equity valuations, particularly for small-cap stocks (Russell 2000 down 8%) and other rate-sensitive sectors.

Strong Economic Data Keeps Further Fed Rate Hikes In Play

Strong economic data releases reinforce the growth narrative while keeping central bank tightening on the table.

• PMI Strengths: S&P Global manufacturing rose to 57.0 and services reached 54.7, pushing the composite index to a five-year high. Manufacturing strength was heavily buoyed by demand from the AI and defense sectors.
• Policy Flexibility: These robust activity numbers support ongoing corporate earnings growth while giving the Fed ample room to execute another rate hike if inflation remains sticky.
• Market Pricing: Futures markets are currently pricing in a high probability of another 25-basis-point rate hike by December.

Higher Oil Prices Keeping Pressure On Treasury Yields

Geopolitical developments in the Middle East continue to drive energy volatility and fixed-income yields.

• Strait of Hormuz Talks: As world leaders convened at the United Nations, Iran proposed reopening the Strait of Hormuz on its terms. White House officials initially called discussions “productive,” but negotiations appeared to break down over the weekend.
• Oil-Yield Correlation: WTI crude oil remains above $90 per barrel ($93.04). Oil prices and 10-year Treasury yields continue to move in tight lockstep. Any pullback in crude could offer yield relief, whereas a renewed crude rally will keep yields elevated.
• 2-Year Yield Signal: The 2-year Treasury yield climbed to 4.85%, reflecting clear market expectations for additional Fed tightening before year-end.

The Treasury Curve Is Bear-Flattening

The yield curve is undergoing a classic bear-flattening structure as short-term rates rise faster than long-term rates.

• 2s-10s Spread: The spread between 2-year and 10-year Treasury yields has narrowed to 28 basis points (0.28%).
• Economic Implication: This flattening pattern indicates that investors anticipate further monetary tightening and potentially slower future economic growth, even as inflation and fiscal deficit expansion anchor long yields at elevated levels.

Key Market Levels & Indicators Summary

Technology Leadership Remains Intact & Crypto Winter Ends

Despite rising rates, secular growth drivers continue to power leadership sectors.

• Low Correlation to Rates: Since 1990, weekly data show a correlation of only 0.034 between Technology stock performance and the federal funds rate. Earnings growth and secular trends exert a far greater influence than central bank rate decisions.
• Magnificent 7 & Semiconductor Breakouts: The Magnificent 7 Index reached new all-time highs, while the VanEck Semiconductor ETF (SMH) broke above its intermediate downtrend to resume its primary uptrend. Tech, AI infrastructure, chips, and cybersecurity continue to lead.
• Bitcoin Breakout: Bitcoin broke out of an eight-month consolidation base and is testing that breakout near $84,157. Broad strength across Bitcoin, semiconductors, and big tech confirms strong underlying risk appetite and liquidity, signaling an official end to the “crypto winter”.

Midterm Elections Are Beginning To Affect Sector Performance

With the U.S. midterm elections just over five weeks away, political forecasting is impacting sector allocation.

• Developing Democratic Wave: Strategas analyst Dan Clifton notes that political conditions closely mirror the 2006 midterm election cycle. A second-term president facing low approval ratings due to Middle East conflict and high gasoline prices creates a setup similar to 2006, when Democrats gained 31 House seats and 6 Senate seats.
• Affected Sectors: Shifting election expectations are actively driving performance in Industrials, Real Estate, Financials, Defense, Energy, and Healthcare.

Sector Model Readings & Overbought / Oversold Oscillator Status

Information Technology reclaimed the top spot in Sanctuary’s sector momentum model, while Utilities remains the primary laggard for the eighth consecutive week.

Disclosures & Disclaimer

Sanctuary makes no representation as to the accuracy or completeness of information contained herein. Any forward-looking statements are based on assumptions, may not materialize, and are subject to change without notice. The information is based upon data available to the public and is not an offer to sell or solicitation of offers to buy any securities mentioned herein. Any investment discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request.

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