The swift pullback in energy costs is a tailwind for the economy, says Evercore ISI
Oil prices have dived from $120 a barrel
Crude-oil futures started the new week below the $70-a-barrel mark, while stock-index futures were gaining ground.
Though the tick-by-tick inverse correlation with S&P 500 futures (ES00) has weakened of late, the sight of oil (CL.1) well down from recent highs continues to support Wall Street. And the good news for equity investors is that historic trends suggest the equity market's tailwind from cheaper energy costs should persevere for a while yet.
That's according to Evercore ISI senior managing director Julian Emanuel, who, in a note that published Sunday, examined what happens to the market after oil exits what he terms "the danger zone" of sharply higher prices.
"The July 4 fireworks displays were seen around the country last night, and while inflation continues to be top of mind for the public due to vote in 11/3's midterm elections, triple-digit oil is no longer a talking point. Mercifully," says Emanuel.
That's because WTI's pullback has been so swift. U.S. benchmark crude traded near $120 a barrel just a few months ago, pushing the price some 40% or more above its 24-month moving average (MMA), according to Emanuel.
"Historically, stock market returns have been negative when oil rose and sustained 35-50% above its 24-MMA," he notes.
However, West Texas Intermediate crude has now fallen below its 24-MMA, one of the quickest such moving-average retracements of all previous oil market spikes.
The drop in prices is not just supporting stock-market sentiment, but obviously has a real economic impact, most notably on consumers as gas prices at the pump are $4 and falling, notes Emanuel.
"Unsurprisingly, equities have historically performed well in these environments, with the S&P 500 gaining an average of 17% over the subsequent 12 months, accompanied by gently lower realized volatility than in the preceding period," he says.
Indeed, Emanuel has looked at how various sectors perform after oil has spiked to more than 40% above its 24-MMA and then pulled back.
Source: Evercore ISI
Notable strength is seen in info tech, consumer discretionary, as well the Nasdaq Composite broadly, and this dovetails with Evercore's belief that the structural "AI Revolution" earnings-driven bull market has further to run.
"The fundamental underpinnings are solid - the oil price decline itself reduces economic headwinds that could precipitate a recession - the consumer's purchasing power is bolstered and the virtuous circle between a solid economy and labor market strength remains intact," says Emanuel.
Energy earnings will be affected in coming months, but the stock market more broadly will be underpinned by the forecast for "robust double digit earnings growth," he adds. Evercore's S&P 500 target for the end of 2026 remains at 7,750, while many peers see 8,000.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY has risen, as oil futures (CL.1) slip and gold futures (GC00) trade around $4,160 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7483.24 1.71% -1.33% 9.32% 19.17% Nasdaq Composite 25,832.67 1.87% -3.72% 11.15% 25.39% 10-year Treasury 4.467 9.60 -5.50 29.50 11.60 Gold 4161.3 3.25% -4.42% -3.94% 24.35% Oil 68.29 -3.02% -25.19% 18.95% 0.54% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
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The chart
U.S. small-cap stocks, represented by the Russell 2000 RUT, have had a good run. But though they have recently hit a record high and registered a 20.7% gain for 2026, fund flows into the Russell have been toward the low end of the last 20 years, notes Callum Thomas, Topdown Charts' head of research and founder. "Thanks in part to passive index investing and the primacy of big tech, small caps have become a neglected part of the market e.g. ETF [exchange-traded fund] market share (implied allocations) and rolling net-fund-flows for small caps are ticking up off record lows," Thomas says. "That is a classic contrarian bullish signal."
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia SPCX Space Exploration Technologies MU Micron Technology TSLA Tesla TSM Taiwan Semiconductor Manufacturing MSFT Microsoft AMD Advanced Micro Devices GME GameStop SNDK Sandisk AAPL Apple
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July 06, 2026 06:37 ET (10:37 GMT)
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