Oil prices surge to two-week winning streak as Iran supply fears grip markets
All the major indexes are in the green YTD, with the Russell 2000 leading by far at +8.2% to a new all-time high. The AI trade has become focused on the hardware side, where semiconductors are up 11.2% YTD, while the Magnificent 7 is down 1.1%. There are growing concerns that the software part of the AI growth will be coming in ’27 - ’28 after the data centers are built out. The NASDAQ is up 1.3% YTD, the S&P +1.5%, the even-weighted S&P 3.9%, and the Dow 2.8%. It’s encouraging that small caps are so strong; it reflects a risk-on sentiment about the economy, but a lack of enthusiasm for Mega Tech will hold back market gains due to their heavy weight.
Weighing on the market today is rising interest rates, where the US 2-year is up another +3bps to 3.6%, the highest in a month. The 10-year + 4bps back to 4.2%, the highest in 4 months. Even the one-month is higher at 3.66%, a one-month high, and this is with the Fed aggressively buying $40B a month of US bills. International yields are also rising. This shift doesn’t appear to be inflation-driven but may be due to the huge amount of debt refinancing coming in 2026, something that can only be addressed with further QE (quantitative easing) by the Fed, something that has heretofore been employed only during periods of high financial stress, not during strong economic growth and high stock prices.
On the commodity front, we’re seeing more profit taking in precious metals with silver down 5%, copper down 3.4%, and gold down 1.2%. Crude oil hit $60/bbl while natural gas and gasoline are flat. Crypto is softer with Bitcoin below $94.5K as the proposed new regulations are being revised.
Next week, we not only get a full slate of earnings (though no Magnificent 7s), but the annual World Economic Forum meeting in Davos is taking place. Hopefully, earnings will be supportive, and we’ll get some easing of interest rates. While trends appear cautious, investors should remember we remain close to all-time highs, and the economy is still strong.