The S&P 500 has now declined about 2% from the Aug. 13 highs, but while several reasons are being cited for the pullback, most of these stock declines stem from the conflict in Iran.
Importantly, it’s not about escalation in the conflict, as no one thinks this is going to spiral into a broader regional war. Instead, it’s that there’s “no end in sight.” The reality is that a lot of oil is still exiting the Persian Gulf, either through Hormuz or via the Red Sea. While exact measures are hard to find given the amount of “dark” transits (meaning ships with Automatic Identification Systems (AIS) turned off), the reality is many energy industry analysts believe that 60%-70% of pre-war oil flows are occurring.
That type of deficit is manageable for a time with global oil supplies (and it’s why oil prices fell to the $70- $80/bbl level when there were ceasefire hopes). The reason oil is at the highest levels of the summer, and stocks are declining, is because if there’s “no end in sight,” then the longer it occurs, the more unsustainable it becomes to “make up” for the reduced flows from Hormuz.
The headlines of the past two weeks, including the U.S. economic escalation, reciprocal strikes between the U.S. and Iran, and most recently, the Houthis seizing Yemeni port towns and putting Red Sea oil traffic in play, all add to the no-end-in-sight fears. Those fears are the reason oil is climbing, and higher oil is the biggest reason Treasury yields have hit multi-year highs (which is the biggest negative influence on the markets).
To be clear, that isn’t the only reason that yields are higher, but it is the biggest one. Here’s why this matters. All that has to happen for oil to reverse lower meaningfully is for the market to lose the fear that there’s no end in sight. That just means legitimate progress towards a ceasefire or a general détente. If we get legitimate headlines, even that the U.S. and Iran are restarting ceasefire negotiations, that will hit oil hard (Brent likely will fall back below $90/bbl) and, in turn, will hit Treasury yields.
It’s not unreasonable to think the 10-year yield can drop back below 4.70% (and maybe towards 4.50%) if oil drops and the no-end-in-sight fears are reduced. Bottom line, the pullback in stocks isn’t being totally driven by the no-end-in-sight fears, but that’s the vast majority of it, so if there are headlines that erase those fears, then the market should bounce back and be led by the sectors/factors that have lagged, i.e., small caps, cyclicals, and higher-valuation tech (these are the sectors that have been hit hardest as yields have risen).
Conversely, if the no-end-in-sight fears continue for several more weeks, then elevated oil and gasoline/diesel prices will likely begin to weigh on growth and Fed expectations, and this pullback could start to morph into something bigger. Bottom line, this pullback is fixable, and all we need is to reduce fears of no end in sight, but it needs to come sooner rather than later.
In addition to the war, we have a seasonal issue. September has historically been the worst month of the year, followed by October for various reasons. So until we get to November, we won’t see any meaningful upturn. After November, my guess is the markets will begin a rally that will take into next year. We will wait and see. For now, a 40% commitment to bonds is reasonable.
Source: Sevens Report 9-14-26