The S&P 500 slipped lower last week on a familiar refrain of higher oil and Treasury yields, and for the past month plus, the S&P 500 has largely become “stuck” as it’s being pulled in opposite directions by two strong forces. The bullish “pull” is coming from historically large annual earnings growth, solid economic activity, and reasonable valuations (using 2027 expected S&P 500 EPS).
The bearish “pull” is also well known: Higher oil, multi-year highs in Treasury yields, geopolitical anxiety, and concerns that the AI data center/capex boom could turn into a bust. Given these two forces have created a bit of a “stalemate” in the S&P 500, I wanted to cover what events could create a breakout one way or the other, either bullish and back to new highs or bearish (which would turn this into a more significant pullback).
Bullish Break of the Stalemate: The events that cause a resumption of the rally here are clear: improvement in the Middle East/Persian Gulf. As we and others have covered, that doesn’t mean a ceasefire agreement. Because the current situation is unsustainable for everyone (Iran’s economy, U.S. military presence) and positive progress towards a détente that results in 1) Increased oil flows from Hormuz and 2) No continued interruption of oil exiting the Gulf via other means (including no more attacks on the East-West pipeline or harassment of ships in the Bab el-Mandeb).
To drive home the point, this isn’t about an “end” to the conflict. It’s about increased oil flows (the markets won’t care if the U.S./Iran war isn’t over as long as oil flows at a greater rate). Those headlines should, almost immediately, push Brent crude back towards $80/bbl and result in a solid drop in Treasury yields (10-year back towards the mid-4.00% range) that will remove the main headwind on this market and allow investors to refocus on earnings growth, a solid economy, and falling inflation/prices.
Bearish Break of the Stalemate: The economy begins to slow. The market has stayed resilient simply because the “good” forces supporting it are so strong they can offset the aforementioned headwinds, but the U.S. economy is not impervious to the laws of economics. We are about to enter the seventh month of elevated energy prices, are enduring nearly the sixth year of higher inflation, and these things do matter to an economy, eventually. If we begin to see signs that everything is costing more, combined with even slight deterioration in the labor market, is starting to slow economic growth, then this market stalemate will break negatively, and in a bad way.
Here’s the point: The U.S. economy is very strong and resilient, but the longer it’s faced with these elevated prices and uncertainty, the greater the chance it begins to slow. That would be a major negative (thankfully, though, there are no real signs it’s happening, but as anyone who has been in this business for long knows, it can change quickly).
Bottom line, the market is caught in a stalemate, and eventually that stalemate will break one way or the other.
This week, there is some hope that the U.N. General Assembly could facilitate diplomatic progress between the U.S. and Iran. If that happens, we would expect oil prices and bond yields to decline and stocks to rally. If diplomatic efforts fail and tensions escalate, we could see additional short-term lows in the stock market.
What does this mean for your portfolio?
We are currently positioned moderately conservatively, with approximately 40% of the portfolio allocated to bonds. Given the current market environment and the transition we are experiencing, we believe this is a reasonable position. It provides some protection if the market experiences another downturn while maintaining enough exposure to participate in a meaningful market recovery.
If the market turns more positive by year-end, we will be prepared to make adjustments toward greater growth exposure. We will communicate with you before making any changes so that you have an opportunity to discuss them with me if you wish.
If the news and market environment turn more negative, we will maintain our current positioning and may consider increasing our allocation to bonds.
For now, we believe maintaining the status quo is a reasonable approach. Our objective is to reduce the impact of a potential downturn while remaining positioned to participate in the upside if market conditions improve.
Source: Sevens Report 9-21-26