Oil prices have emerged as a critical factor for stock market performance heading into the end of the year. WTI crude closed near $92 on Friday, down sharply from levels above $100 earlier in the month.
Turtle Creek strategist David Spika believes the S&P 500 could climb another 5% to 10% before year-end if oil prices continue their retreat. His thesis centers on the relationship between crude costs and inflation expectations.
How Oil Affects Treasury Yields and Stocks
The US 10-year Treasury yield reached 5.17% on Friday, its highest level since 2007, following a Federal Reserve rate increase. Higher yields typically pressure equity valuations, as investors view Treasury bonds as safer alternatives.
Spika argues that falling oil prices could ease inflation pressure, in turn dragging long-term borrowing costs lower and providing room for stock valuations to expand. He suggests the 10-year Treasury yield could decline toward 4.75%-4.78% if oil prices continue falling.
Factors Supporting Lower Oil Prices
Saudi Arabia has restarted its East-West pipeline, creating an alternative route for crude around the Strait of Hormuz. Additionally, US officials held a three-hour meeting with Iran's delegation at the UN this week, according to comments from Donald Trump.
Risks to the Outlook
The strategist's bullish case rests on a key assumption: oil prices remain low enough to convince bond markets that inflation faces another source of pressure relief. Oil prices can reverse quickly, and flows through the Strait of Hormuz remain below pre-war levels. Peace efforts remain uncertain, and investors are weighing additional rate-hike risk.
Spika warned that earnings growth should slow in the year ahead, despite his near-term stock market optimism.
