This round of correction in the U.S. stock market has a very clear trigger: crude oil stayed at elevated levels for too long, pushing up U.S. inflation data. This, in turn, raised expectations of Federal Reserve rate hikes and led to an unexpected surge in U.S. Treasury yields. As a result, capital rotated from equities into bonds, and under the pressure of higher interest rates, U.S. stocks experienced profit-taking and mean reversion.
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At present, U.S. core inflation expectations are close to breaking historical resistance levels.
Meanwhile, pricing in the swap market suggests that derivatives markets are currently expecting the U.S. to possibly raise rates once in 2026.
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You may have a concern: will this inflation-driven capital rotation—from U.S. equities into bonds—develop into a major stock market crisis? My view is that this correction is unlikely to evolve into a large-scale crisis. Over the next two years, it will be difficult for U.S. inflation to accelerate sharply on a monthly basis, and crude oil prices are very likely near their peak.
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The “main culprit” behind rising inflation is crude oil.
To determine whether this correction could trigger a major crisis, we first need to understand whether the current rise in inflation is a temporary disturbance or the beginning of a long-term trend.
Looking at the charts alone, the current year-over-year U.S. inflation trend does resemble the high-inflation period from the 1960s to the 1980s. However, I do not believe a sharp surge in inflation will repeat within the next year or so, especially given the critical political timing of the upcoming midterm elections.
Why so certain? We need to break down the components of U.S. inflation. Previously, the decline in inflation was largely driven by energy prices—especially crude oil—remaining low. In contrast, food, services, and housing components saw little change, with some even continuing to rise year-over-year. It was mainly the drop in oil prices that pulled down overall inflation.
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Similarly, the current rebound in inflation is again driven primarily by crude oil. The latest U.S. CPI data shows a 0.5% month-over-month increase and a 4.2% year-over-year increase, the highest since May 2023. Energy prices stood out, rising 1.5%, marking the largest annual increase since August 2022. By comparison, food and core goods prices were nearly unchanged from the previous month.
Therefore, whether inflation will spiral out of control, whether the dollar will surge, and whether U.S. stocks will decline sharply—all depend on one key factor: whether crude oil prices can be contained.
Crude oil is likely nearing a peak.
If oil prices can be controlled and fail to make new highs, I believe U.S. stocks will not fall significantly. More interestingly, if oil peaks and enters a pullback phase, risk assets such as equities may continue to rise and even reach new highs. Compared to the dot-com bubble, the current AI boom is relatively modest, and recent IPO fundraising by large companies has not been excessive. These internal factors alone are insufficient to trigger a major market downturn.
So, can oil peak? I believe the probability is high.
From a technical perspective, oil appears to be forming a topping pattern. If prices fall below the key level of $83.8, they could decline further toward the $60 range.
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You might ask: if the Strait of Hormuz remains disrupted, why hasn’t oil reached new highs? The answer lies in macro fundamentals. First, global oil demand is currently not strong. Second, alternative transportation routes outside Hormuz have already replaced more than half of previous shipping capacity.
But the most important factor comes from China. China’s crude oil imports have recently dropped sharply. Without delving into the reasons, the objective result is that this decline has helped stabilize U.S. inflation and, in effect, has indirectly benefited both the U.S. and Trump.
In other words, the world’s two largest economies currently have no desire to see oil prices spiral out of control. Under this tacit alignment and strategic balance, the probability of runaway oil prices is extremely low.
If oil is indeed near its peak and major U.S. tech companies continue to deliver strong earnings growth, then U.S. stocks are unlikely to fall much further. I also do not believe there will be another rate hike this year, as oil prices are likely to be contained.
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Watch the S&P 500 20-day moving average.
Since this is unlikely to become a major crisis, how should we approach trading during this correction?
In the short term, the pullback driven by rate hike expectations may not yet be over. The S&P 500 is currently facing strong resistance at its 20-day moving average. If you want to establish short positions, you could consider going long volatility (VIX) or short Nasdaq-related assets. However, if S&P futures close above the 20-day moving average, you should be cautious and stop losses in time.
In addition, gold and silver, which have recently fallen sharply, should not be rushed for bottom-fishing unless they break above their 200-day moving averages. During a period of dollar strength, they are likely to remain under pressure and trade weakly, making them difficult to operate.
During the upcoming phase of dollar strength, market volatility in both directions will likely increase. The short-term turning point is this: if the S&P 500 can rise above the 20-day moving average and close above it, market sentiment may turn positive next week, and this correction of over 7% could come to an end. For example, the Russell futures have already broken above previous highs.
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