MW What oil's big pullback this week may mean for the U.S. stock market

By Myra P. Saefong

U.S. benchmark WTI oil tallied a two-session drop of 14% this week

Oil prices have tallied steep losses so far this week, pulling back sharply from gains seen at the start of the Israel-Iran conflict less than two weeks ago.

That's helped ease worries about inflation and added to the dramatic rally in stocks, with the S&P 500 index SPX ending Wednesday up 22.3% from its April 8 low, according to Dow Jones Market Data.

The quick reversals in U.S. oil and stock prices now have Wall Street rethinking the old playbook about the American economy and oil shocks.

"The oil market isn't desensitized to geopolitical risk - it's just grown up," Stephen Innes, managing partner at SPI Asset Management, told MarketWatch. "After a decade of watching every headline-driven spike fizzle out into nothing but slippage and carry cost, crude traders have recalibrated. The old playbook - buy the bomb, panic at the headline - is dead.

"Real barrels matter more than theater," he added, and "unless a missile punches a hole in a tanker or shuts the Strait of Hormuz, the reflex is no longer bid - it's fade."

Read: Shipping costs through the Strait of Hormuz are rising - even as oil prices are dropping. So what happens if Iran closes the waterway?

U.S. benchmark crude futures dropped by 8.6% on Monday alone. Prices fell again Tuesday, with West Texas Intermediate crude for August delivery (CL.1) (CLQ25) down 6% to settle at $64.37 a barrel on the New York Mercantile Exchange to tally a two-session loss of 14.1%. August Brent crude (BRN00) (BRNQ25), the global benchmark, fell 6.1% Tuesday to end at $67.14 on ICE Futures Europe, shedding a total of 12.8% across the two sessions.

By the end of trading Tuesday, WTI and Brent had posted their largest two-session declines since March 10, 2022, according to Dow Jones Market Data. They both finished a bit higher Wednesday.

While oil has dropped from its recent highs, the S&P 500 - in what David Rosenberg of Rosenberg Research referred to as the "most bizarre fashion" - has climbed to within 1% of a new record high.

Read: S&P 500 nears record as stocks soar, oil sinks and investors throw caution to the wind

Some analysts attributed Tuesday's rally in the U.S. stock market to falling oil prices, which tend to ease inflationary worries and may, in turn, give the Federal Reserve a chance to resume cutting interest rates that can provide a lift to the economy.

"Taking out 'tail risk' in the Israeli-Iran conflict has helped bring crude prices back down, but the big story was that during peak anxiety in this 12-day war, the best WTI could do was touch $75 per barrel," Rosenberg wrote in a note dated Wednesday.

"That is the story," he added - noting that at the onset of the Russia-Ukraine war in 2022, oil prices hit $115 per barrel.

Then and now

In 2022, the U.S. and global economies were in a different place than they are today, noted Jeff Mayberry, portfolio manager at DoubleLine. "Coming out of the global pandemic, growth was strong and U.S. unemployment was severely constrained, which meant the U.S. economy could stomach higher oil prices without causing a recession."

Today, there appear to be "some cracks in the labor market, and the economic data teeters on the edge of potential recession," he said. "Oil prices cannot rise to a high level for an extended period of time before they could push the U.S. economy into recession."

Yet the muted price reaction in oil may really be centered around excess supply, not falling demand - and barring a significant geopolitical supply curtailment, the market is likely to keep a lid on oil prices, said David Grumhaus, president and chief investment officer of Duff & Phelps.

Grumhaus said he expects to see "solid but not robust oil demand from here."

For now, oil's failure to rally as strongly as it did when the Russia-Ukraine war started shows that global demand currently looks much weaker than a few years ago, said Rosenberg. Other commodities that have little do with the Middle East conflict, such as metals and lumber, also have fallen sharply - and that attests to a "world economy that is cooling off," he said.

"How this translates into a bullish outlook for corporate earnings is anyone's guess," Rosenberg said.

Stocks continue to rally

Even so, high volatility in oil prices often benefits the major U.S. stock indexes, Jason Goepfert, senior research analyst at SentimenTrader, wrote in a note sent out Wednesday.

For the first time since historic levels of volatility during the COVID pandemic, and a few times outside that havoc, "oil more than reversed a large intraday rally," he noted. "There have only been a handful of times the [oil futures] contract rallied more than 3% intraday, only to close more than 5% below its prior close." WTI oil had climbed as high as $81.40 Monday, but settled at $71.48.

SentimenTrader looked at other times in history when crude oil saw an intraday rally of more than 3% before closing out those sessions with a loss of more than 5%.

During those times, the S&P 500 witnessed a minimum gain of 21.2% over the following year - with SentimenTrader's chart showing an average maximum gain of 39.1% in the 12 months after the date of crude oil's big intraday move.

"Looking at one-year returns following a one-day reversal pattern may be foolhardy, but the returns ... were compelling enough to at least mention," said Goepfert. Crude oil showed a "strong tendency to continue its decline over short time frames of a few weeks or shorter," but these periods of heightened volatility showed similarly strong tendency to rebound in the months following that.

"The drop in oil prices was a boon to stock indices," he added.

Read: How today's stock market compares to the one during the Arab oil embargo of 1973

However, Pavel Molchanov, investment-strategy analyst at Raymond James, downplayed the usual correlation between the oil and stock markets, which often times have moved in the same direction. "Correlation is not the same as causation," he told MarketWatch.

"Equity performance, in the U.S. as well as other major economies, is ultimately driven by corporate earnings," said Molchanov. "The energy sector has become such a small portion of the stock market - barely 3% of S&P 500 market cap - that it plays only a marginal role in the overall landscape of corporate profitability."

-Myra P. Saefong

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June 26, 2025 07:00 ET (11:00 GMT)

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