Oil, Inflation, and the Economy: Will the Stock Market Break?

Will surging oil prices topple the stock market as “stagflation” fears send traders scrambling for the exits?

• Crude oil prices climb despite emergency reserve releases
• Rising yields are pressuring stocks, boosting the US dollar
• Revised US GDP, consumer confidence data now in focus

Financial markets remain gripped by a familiar macro narrative: rising oil prices are stoking inflation fears and forcing investors to reconsider expectations for Federal Reserve rate cuts.

Crude oil prices have resumed their advance even after the International Energy Agency (IEA) announced the release of 400 million barrels from emergency reserves. The move highlights how persistent supply concerns have become as markets digest the impact of the ongoing US-Iran conflict on global energy flows.

That is reverberating across assets.

Treasury bonds are under pressure as investors anticipate higher inflation and bid up yields. The US dollar has strengthened alongside rising rates, benefiting both from improved yield appeal and its traditional role as a haven asset during periods of market stress. Gold is understandably struggling.

US stocks have turned sharply lower. The bellwether S&P 500 fell 1.5% on Thursday, suffering its biggest one-day loss in a month and posting its lowest daily close since late November. The tech-tilted Nasdaq 100 fell 1.7% while the small-cap Russell 2000 index lost 2.12%.

Surging oil prices are scattering Fed rate cut expectations

A rethink of US monetary policy expectations seems to be at work.

Traders have begun unwinding the rate cuts they’d priced into the outlook for the Federal Reserve. Markets have become unsure of seeing even a single 25-basis-point (bps) reduction in 2026, having been wholly convinced that they will get two of them for most of the past year. 

The adjustment reflects a simple calculus: higher oil prices raise inflation expectations, which in turn make it harder for the Fed to justify cutting rates.

Wall Street understandably dislikes this. Fed Chair Jerome Powell marked a top for the S&P 500 in late October when he chastised markets for over-extrapolating rate-cut expectations as a press conference following that month’s FOMC policy meeting. It has been stuck in a choppy range below those highs ever since.

The markets and the central bank have been at odds about where policy ought to go at least since June last year, with traders demanding more stimulus faster and officials resisting. Buffeted by uncertainty, investors seemed to cry out for more cheap-money insurance, but the Fed’s strict inflation and employment mandates kept it modest.

Is the US economy headed for “stagflation”?

Incoming data may bring the markets their next catalyst.

Revised fourth-quarter US gross domestic product (GDP) data is first up. Preliminary estimates showed growth slowed to an annualized 1.4%, down from 4.4% in the third quarter. That result marked the weakest performance since the first quarter of 2025, when the economy shrank amid nervous anticipation of new US tariffs.

Perhaps most critically, those figures revealed a worrying decline in the contribution from private consumption to overall output. Household spending accounts for close to 68% of GDP growth. It is not hard to see how this could amount to a major threat for the economy under current circumstances if it was already fragile late last year.

That might make the upcoming University of Michigan (UofM) consumer confidence report especially interesting. The first edition of the March edition is expected to show sentiment falling to a three-month low. If inflation expectations driven by rising oil prices weigh heavily on confidence, that would spell trouble for the economy as a whole.

This “stagflation” scenario – where high inflation and weak growth coexist – is a nightmare for Fed officials and market participants alike. The central bank struggles to deliver timely stimulus lest it fan the flames of price growth just when demand could use the encouragement.

Already shellshocked markets may struggle to digest data painting such a picture. 

Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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