Oil Prices Dragging Rates Higher, Ending the 'Easy Gains' Era of the US Stock Bull Market

The US stock bull market, approaching its fourth anniversary in October, is facing its toughest challenge in years. As geopolitical risks surrounding Iran escalate, global energy supply chains are once again under pressure. Surging oil prices are not only hitting the real economy but also pushing up market expectations that US interest rates will remain elevated. Against this backdrop, investors are beginning to question whether the loose liquidity and tech-stock dominance that have supported the US market's four-year rally have reached a critical turning point.

Patrick De Haan, analyst at GasBuddy, has issued a warning, forecasting that US retail gasoline prices could rise further to $4.15–$4.25 per gallon in the coming weeks.

The butterfly effect of oil price volatility has rapidly spread to the bond market. The yield on the US 10-year Treasury has climbed to 4.66%, while the 30-year yield has remained above 5% for an extended period. The sharp rise in risk-free rates is putting significant pressure on growth assets that previously relied on low financing costs.

Keith Lerner, Chief Investment Officer at Truist Advisory Services, has pinpointed the core issue, stating that 'oil prices are now dragging rates higher.' This dual blow has placed the Federal Reserve's monetary policy in a dilemma, and expectations for rate hikes have quietly risen.

In the federal funds futures market, the probability of a rate hike has surged from 25.7% last week to 33.7%. Federal Reserve Chair Kevin Warsh has taken a hardline stance, suggesting investors should abandon blind reliance on 'central bank guidance.' Future policy will be adjusted in 'real time,' reopening the window for rate hikes.

However, there is significant disagreement in the market over whether this move is justified.

Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, boldly criticized the move, arguing that if the Fed opts to raise rates under the current complex geopolitical environment, it would be a serious policy misjudgment. Not only would it exacerbate the risk of economic recession, but it would also deliver a fatal blow to low-income households already suffering from high prices.

In the midst of this storm, the engine of the past four years' bull market—tech giants—is suffering from the 'chronic poison' of high interest rates. The Philadelphia Semiconductor Index (SOX) has fallen more than 20% from its peak, officially entering a technical bear market.

The long-standing warning from famed short-seller Michael Burry—the real-life inspiration behind the film 'The Big Short'—that big tech's capital expenditures are unsustainable, appears to be slowly materializing in market reality. Yet, the market has not collapsed entirely. Capital flows reveal a fascinating 'great migration' trend.

While the semiconductor sector is in turmoil, the S&P 500 Equal Weight Index (RSP) recently hit a new all-time high, indicating that capital is not exiting the market but rather shifting from overcrowded popular sectors to healthcare, financials, and undervalued blue-chip stocks.

Experts believe that while market conditions after July will become more 'bumpy,' this adjustment is actually a reallocation of risk.

This evolution from a single AI-driven theme to a healthier, multi-sector-supported market may intensify volatility for some popular stocks in the short term, but in the long run, a bull market sustained by multiple industries will be far more stable than the previous semiconductor-dependent 'one-legged' model.

Analysts emphasize that investors must accept the reality that 'volatility is the price of high returns.' If a portfolio is merely a stack of AI-related stocks, it amounts to a massive gamble under the current macroeconomic environment.

For investors hoping to survive in a post-'easy mode' US stock market, breaking free from a single growth narrative and embracing more diversified asset allocation will be essential to steadily progress through high volatility.