Weekly Market Update: Stocks Set New Records as Oil Pulls Back and Rates Ease
Stocks continued their climb through a holiday-shortened week, with the major indexes setting fresh records along the way. The S&P 500, Nasdaq, and Dow each closed at new all-time highs, and the rally showed signs of widening beyond the largest technology companies. Small-cap stocks and the equal-weight S&P 500 participated more meaningfully than they had in recent weeks.
Technology remained the strongest sector, helping lift both the market-cap-weighted index and growth stocks higher. Defensive sectors and energy lagged as investors responded to signs of diplomatic progress in the Middle East. Oil prices moved lower, which helped Treasury yields reverse some of their recent climb. That decline in rates offered relief to bonds and other rate-sensitive areas of the market. Volatility also eased, with the VIX drifting lower as geopolitical concerns cooled and stocks moved higher.
Key Takeaways
Inflation Remains Elevated, But the Pace of Price Increases Eased Last Month
The April PCE price index, the Fed’s preferred inflation measure, rose +3.8% year-over-year, its highest reading since May 2023. However, the monthly increase of +0.4% came in below the +0.5% forecast and slowed from March’s +0.7% increase. Much of the pressure in the headline number was tied to energy prices following the ongoing Strait of Hormuz oil disruption.
Core PCE, which excludes food and energy, rose just +0.2% for the month, below the +0.3% consensus estimate. On a year-over-year basis, core inflation edged up from +3.2% to +3.3%.
Why it matters: The energy shock is still showing up in the annual inflation data, but the softer monthly core reading suggests that price pressures have not yet broadened across the economy. Investors will be watching upcoming inflation reports closely for signs that higher energy costs are beginning to spill over into other areas.
Economic Growth in Q1 Was Slower Than Initially Estimated
The second estimate of first-quarter GDP was revised lower to a +1.6% annualized pace, down from the initial +2% reading. The downgrade arrived the same morning as the hotter inflation report, underscoring the tension between slower growth and still-elevated prices.
Why it matters: Growth rebounded in Q1 following the Q4 government shutdown, but the combination of slower growth and elevated inflation raises the possibility of a more challenging backdrop. That type of environment would make the Fed’s job more difficult, because cutting rates to support growth could risk putting additional pressure on inflation.
Major Stock Indexes Continued to Set New Highs This Week
The Dow, S&P 500, and Nasdaq each reached new records, extending the rally that began in late March. Importantly, the gains were not limited to the largest technology companies. Small-cap stocks and the equal-weight S&P 500 also moved to new highs.
Why it matters: Large technology stocks have carried much of the market’s advance since late March, and market breadth has been uneven at times. This week’s broader participation from the Dow, small caps, and the average S&P 500 stock is a constructive sign that the rally is becoming less dependent on a narrow group of companies.
Middle East Headlines Continue to Drive Oil Prices and Impact Market Sentiment
Iran reported a preliminary agreement to extend the ceasefire and guarantee shipping through the Strait of Hormuz, briefly sparking a risk-on move before U.S. officials disputed the document. Later in the week, renewed ceasefire headlines helped push stocks toward new all-time highs.
Oil prices pulled back over the week, with crude trading near $90 and on pace for a second consecutive weekly decline as markets priced in the possibility of an eventual agreement.
Why it matters: The Strait of Hormuz remains the biggest wildcard for energy prices and, by extension, inflation. A genuine resolution would be a meaningful positive for both markets and consumers. However, this week’s back-and-forth is a reminder that the headlines remain volatile and the outcome is still uncertain.
Interest Rates Reversed Lower as Oil Prices Declined
Treasury yields had climbed sharply in recent weeks, with the 30-year yield reaching a two-decade high as the oil price spike raised inflation concerns. That pressure eased this week as crude prices moved lower. The 10-year Treasury yield fell to around 4.45%, while the 30-year yield dropped back below 5.00%.
The move reflected the broader shift in Middle East sentiment. Reported progress toward reopening the Strait of Hormuz pulled oil prices lower, which also reduced some of the inflation premium that had been built into bond yields.
Why it matters: The recent path of interest rates has been closely tied to oil prices and developments in the Middle East. This week’s reversal provided some relief for bonds, mortgages, and other rate-sensitive parts of the market. Whether that relief lasts will likely depend on whether oil prices remain contained and diplomatic progress continues.