By Daniela Hathorn, senior market analyst at Capital.com
Markets are heading towards the end of the week with US equities attempting to recover after Thursday’s technology-led sell-off on renewed concerns around AI valuations combined with rising oil prices and elevated Treasury yields. However, futures are movinghigher this morning, suggesting investors remain willing to buy into weakness. The underlying tension remains unchanged: corporate earnings expectations are exceptionally strong, but with the 10-year Treasury yield still above 5%, the hurdle for equity valuations is becoming increasingly demanding.
Oil remains a crucial driver of broader risk appetite. Brent has retreated slightly as comments from Washington suggesting progress in US-Iran negotiations helped ease immediate supply concerns. However, continued attacks on shipping around the Strait of Hormuz mean the geopolitical premium is unlikely to disappear quickly. The implications for the broader marekt remians unchanged as higher crude threatens to keep inflation elevated, complicating the Fed’s policy outlook and potentially putting renewed pressure on Treasury yields.
Attention now shifts to next week’s US CPI report and the start of Q3 earnings season. Wednesday’s inflation figures will be particularly important in determining whether the Fed can afford to pause following September’s hike. Meanwhile, major US banks begin reporting on Tuesday, providing an early indication of how businesses and consumers are absorbing higher borrowing costs. Strong earnings combined with moderating inflation would offer the most supportive backdrop for equities. Conversely, persistent price pressures alongside disappointing corporate guidance could expose the vulnerability of a market increasingly dependent on a relatively small group of technology companies to sustain its rally.
