Oil Volatility Drives Rotation
Equities moved lower this week as sustained oil volatility, rising Treasury yields, and escalating geopolitical tensions weighed on investor sentiment.
The week began on a constructive note after oil prices fell sharply on reports suggesting potential negotiations between the U.S. and Iran. The decline in energy prices sparked a broad risk-on rally, with all eleven S&P 500 sectors advancing and major indices briefly reclaiming their 200-day moving averages. However, optimism faded as conflicting headlines reintroduced uncertainty, sending markets back into a choppy, headline-driven pattern.
As the week progressed, oil prices resumed their volatility and Treasury yields moved higher, creating a challenging environment for equities – particularly large-cap growth stocks. Repeated attempts at market rebounds were capped near key technical resistance levels, reinforcing a cautious tone.
Market Outlook and Opportunities
Markets have shifted from confidence to caution as investors grapple with rising energy prices, geopolitical risks, and a more uncertain earnings outlook. Several key market thresholds are approaching – including oil near $100 per barrel, rising gasoline prices, and elevated Treasury yields – levels that could influence policy responses and investor sentiment.
With the S&P 500 nearing correction territory and valuations becoming more attractive, selective opportunities are beginning to emerge with welcoming entry points. However, we are taking a more measured approach with the expectation of continued volatility and lingering risks – such as private credit concerns, tariffs, and AI-driven disruption.
This week reinforced a market increasingly driven by macro forces – particularly oil prices, interest rates, and geopolitical developments. While early-week action suggested underlying resilience and rotation beneath the surface, persistent mega-cap weakness and rising energy prices ultimately weighed on broader market performance.
As long as oil volatility and geopolitical uncertainty remain elevated, markets are likely to experience continued rotation, heightened volatility, and uneven price action in the weeks ahead. However, should geopolitical tensions ease, sentiment could improve quickly, creating opportunities for disciplined investors to gradually re-enter risk assets.
Market pullbacks driven by macro uncertainty (rather than deteriorating fundamentals) have historically provided attractive entry points over time.
Several constructive elements remain in place:
- Economic resilience – Labor markets remain stable, and corporate balance sheets are generally healthy despite rising uncertainty.
- Rotation, not collapse – Market leadership is shifting rather than disappearing, with energy, materials, and defensive sectors showing resilience.
- Improving valuations – The recent pullback has reduced stretched valuations, particularly among high-quality growth companies.
- Cash on the sidelines – Elevated cash levels suggest potential buying power once uncertainty begins to ease.
Global Ripple Effects and Macro Concerns
The implications of the conflict extend well beyond U.S. markets, which are relatively much more insulated from energy shocks than in the past. Europe and Asia – both heavily dependent on imported energy – are experiencing a more pronounced energy shock as shipping disruptions and supply concerns push costs higher. This dynamic increases the risk of slowing global growth, as rising input costs filter through to consumers and businesses, pressuring spending and corporate margins.
Central banks globally now face a more complicated policy backdrop. The resurgence of inflation pressures tied to energy prices has driven sovereign bond yields higher and flattened yield curves, reflecting growing uncertainty around growth expectations.
As a result, investor behavior has shifted. Rather than aggressively buying dips, market participants are becoming more selective, reassessing earnings expectations amid an environment increasingly defined by concerns around stagflation, recession risks, tighter financial conditions, and geopolitical uncertainty.
Week Ahead
This week, the same backdrop of geopolitical tensions, elevated energy prices, and ceasefire negotiations will be in focus.
Economic data will include several key labor market reports, particularly the March Jobs Report on Friday. Retail Sales for February will be released on Wednesday along with important manufacturing data as investors will be looking for positive signs of growth amidst inflation and policy rate uncertainty.
Investors will also be looking for major indices to hold and or regain key technical levels following the last few weeks of selling pressure.
As always, please reach out to us for any questions and thank you for your trust.
Respectfully,
Michael Neill, CFA