S&P 500 gains 0.9% as oil plunge offsets Fed rate hike fears

The S&P 500 rose 0.9% to start the holiday-shortened week, gaining even as new Fed Chair Kevin Warsh signaled rate hikes ahead.

"Ignoring the Fed and focusing on earnings is the most important thing to do at this point," Sam Rines, macro strategist at WisdomTree, said. "If earnings move higher, the market moves higher."

The Nasdaq Composite outperformed with a 2.4% weekly gain, while the Dow Jones Industrial Average added 0.7%. The rally came as WTI crude plunged 10.6% to $75.85 a barrel, its lowest since March 4, after the U.S. and Iran signed a memorandum of understanding that may end the war between the two countries. The Bloomberg Inflation Sensitive Equity Total Return Index turned into an underperformer, according to independent strategist Jim Paulsen, as falling oil prices eased inflation concerns.

The combination of falling energy costs and surging corporate profits creates a favorable setup for equities. S&P 500 companies posted 28.8% year-over-year earnings growth in the first quarter, according to FactSet, with analysts projecting 22% EPS growth in the second quarter and 23.3% for the full year. The final revision of first-quarter GDP, due June 25, is expected to confirm 1.6% growth, while the Atlanta Fed's GDPNow tool points to 3% expansion in the current quarter.

Oil's 10.6% Plunge Reshapes the Inflation Outlook

The Iran deal adds a disinflationary force just as the Fed shifts toward a more hawkish stance. Warsh replaced Jerome Powell's balanced approach with a terse commitment: "The Committee will deliver price stability." Investors now assume rate hikes, not cuts, will be Warsh's first order of business in 2026 — but that calculus depends on inflation staying elevated. The core personal consumption expenditures price index, due June 25, is expected to show a 0.37% month-over-month increase in May, up from 0.2% in April, though peak inflation may already be behind the market. The average U.S. gasoline price fell below $3.99 a gallon, its lowest since late March, providing additional relief to consumers.

Earnings Momentum Provides the Backstop

First-quarter results showed the strongest profit growth in years, with revenue rising 11.8% year-over-year across the S&P 500. Operating margins are heading almost straight up after recovering in 2024, according to Yardeni Research, reflecting the effect of artificial intelligence on corporate efficiency. The upcoming earnings calendar includes Micron Technology on June 24, which will offer a fresh read on the AI trade, along with Carnival on June 22 for the travel rebound and KB Home on June 22 for the housing market. Retail sales came in much stronger than expected despite elevated inflation expectations, and with Amazon.com's Prime Day sale starting next week, June consumer spending could remain robust.

This article is for informational purposes only and does not constitute investment advice.