[Weekly Strategy] Oil prices, oil prices, and more oil prices (Week 40 of 2026 | Issue No. 290)

Last Wednesday, Trump rejected Iran's ceasefire conditions. The Strait of Hormuz remains closed, and the 10-year U.S. Treasury yield surged to 5.34%, its highest since 2002. Friday's non-farm payrolls added only 29,000 jobs.

The S&P 500 fell 0.3% for the week, the Nasdaq 100 ETF rose 0.7%, and the equal-weight S&P ETF dropped 0.7%.

Tracing back every news headline this week leads to a single source: crude oil.

For five months before the war, daily moves in the S&P 500 and crude oil were largely uncorrelated, with a correlation coefficient of +0.16. After hostilities began in late February, that figure flipped to -0.53.

As oil prices rise, stocks fall; as oil prices drop, stocks rally.

Over seven months of conflict, Brent crude climbed from just above $70 to around $100. This pipeline has spawned three key lines: votes, interest rates, and stock prices.

Votes at the Gas Pump

On October 1, the national average price for regular gasoline hit $4.41 per gallon. The September average was $4.33, 50 cents higher than the previous record high for the month. Diesel was even more extreme, breaking $6.50 in late September and shattering historical records.

[Image: News screenshot, AAA Oct 1 announcement title “National Average Dips Following Record-Setting September”, source cited]

Votes follow oil prices. As oil prices started surging in March, Trump's approval rating plummeted to its lowest point since returning to the White House. By September, it had fallen to 32%, a career low for him.

The relationship between oil prices and approval ratings has been calculated many times by academia. Stanford University's Jon Krosnick and colleagues used data from 1976 to 2007 to calculate that for every 10-cent increase in gasoline, presidential approval drops by an average of 0.6 percentage points. A new 2025 study lists oil prices as one of the most powerful variables in predicting presidential approval.

More worth noting is the "ratchet effect" in this relationship. During the June ceasefire, gasoline prices fell nearly $1 from their peak (down 22%), but Trump's approval rating only rebounded slightly. Research from Georgia Tech found similar asymmetry: for every $1 increase in oil prices, searches for "Trump oil prices" spiked significantly; when oil prices fell, search volume remained flat.

Oil prices rise, votes leave; oil prices fall, votes don't return.

Behind this lies a characteristic of American voters: they don't buy into grand narratives; they care about their immediate daily lives.

The White House calls the cost of this war "not too dear a price." Voters use a different accounting method: 70% disapprove of Trump's handling of Iran, 69% believe the war wasn't worth fighting, and 59% say high oil prices forced them to cut or delay other expenses.

Wars are often presidential bonus points. In 1991, during the Gulf War, George H.W. Bush's approval soared to 89%. After 9/11 in 2001, George W. Bush hit 90%, the highest Gallup has ever recorded. Both times, Americans felt the war was fought for them. This time, the rallying-around-the-flag effect did not materialize.

Strategic goals and regional dynamics cannot compete with the $4.40 price tag at the gas pump.

2022 serves as a recent mirror. Again, war pushed up oil prices. Again, it was a midterm election year. Again, the Fed was hiking rates. In June 2022, gasoline peaked at $5.01. By July, Biden's approval had dropped to his term-low of 38%, and in November, Democrats lost control of the House.

Thus, the electoral landscape on November 3rd has largely been written by oil prices over the past seven months.

Hiking Rates Can't Block the Strait

August CPI rose 3.4% YoY, while core CPI (excluding food and energy) was just 2.4%. That middle 1 percentage point is almost entirely oil: energy prices surged 16.3% YoY, and gasoline jumped 27.4%. More than one-third of August's CPI MoM increase came from gasoline.

Excluding oil, headline inflation has returned to just above 2%.

The Fed watches core PCE, which was 3.0% in August, still short of the 2% target. On September 16, the Fed hiked rates for the first time in three years.

At the press conference, a reporter asked Wash: What's the point of a 25bps hike if it won't open the Strait of Hormuz? Wash replied that the Fed can't control individual prices like oil, but must ensure relative price changes don't spread, avoiding secondary or tertiary effects.

In plain terms, the Fed is implementing preemptive rate hikes to counter oil prices.

The market isn't fully convinced. Some economists point out that after six months of war, there's no evidence of wage or inflation expectations spreading.

Compared to 2022, the difference is clear. In September 2022, core CPI hit 6.6%, with inflation seeping into every corner of the economy; today, core CPI is 2.4%. Back then, the Fed was fighting a widespread fire; today, it's guarding against a single match.

The cost of fire prevention falls on interest rates. With the 10-year Treasury yield touching 5.34%, stock valuations must be recalculated.

Growth is also slowing down. Non-farm payrolls added only 29,000, leading markets to bet on a hold in October. The Oct 27-28 FOMC meeting is just one week before the election. Where oil goes, this meeting will lean.

AI is the Floor, Oil is the Ceiling

Since the war began, on the 53 trading days where crude surged >2%, the S&P 500 averaged a 0.47% decline; on the 38 days where crude dropped >2%, the S&P averaged a 0.55% gain. On the 7 days oil fell hardest, the S&P closed green across the board. The most typical case was April 8: upon ceasefire news, crude fell nearly 10%, while the S&P rallied 2.5%.

This isn't coincidence. JPMorgan warned in March that after a 30% surge in oil prices, the correlation between stocks and oil tends to turn increasingly negative. Seven months of data validate this.

The ceiling is visible. The S&P 500's last closing high was 7,798.99 on Aug 13, with no new highs for seven weeks. Over the same period, crude rallied nearly 30%.

What the ceiling presses down on is the majority of stocks. Since Aug 13, the equal-weight S&P ETF has fallen 5.8%, while the Nasdaq 100 ETF has risen 2.4%.

Investment banks calculated this back in March: if oil stabilizes near $110, full-year S&P earnings estimates need to be revised down by 2% to 5%. Goldman Sachs gave a target of 5,400 points under severe oil shock scenarios, compressing forward P/E to 16x.

So why hasn't the index crashed? Because the floor is solid. Q3 S&P 500 earnings are expected to grow 29.5%, exceeding 25% for the third consecutive quarter; forward P/E is 19.0x, lower than the 5-year average.

AI supports the index's floor, while oil caps valuation ceilings. The index drifts sideways between the two, while most stocks are squeezed below the ceiling.

Risk warnings do not equal bearishness; pullbacks are buying opportunities.

The Day the Strait Reopens

April 8 was a dress rehearsal: oil tanked, stocks spiked.

The question is when that day will come. Trump stated the war could end shortly after the midterms, with oil prices following suit; reportedly, he also told aides that resuming bombing post-election is highly likely. These statements contradict each other directionally but align on timing: both hinge on post-election.

November 3 itself isn't the variable; the post-election status of the Strait is.

Oil is today's biggest macro variable, but not the only directional force. If the Strait reopens, the ceiling lifts; if tensions escalate, we look to the thickness of the AI floor. The Q3 earnings season will provide the first answer.

[Next Week Outlook]

U.S. equities next week remain dependent on oil.

Last week's cards were laid out: the Strait remains closed, rates are rising, employment is softening, indices are stabilized by AI leaders, and equal-weight stocks continue to slide.

Next week's table lacks hard data. Wednesday brings the September FOMC minutes; watch how many times "secondary effects" are mentioned, determining whether October sees a hike. The following week, bank stocks kick off Q3 earnings. Every piece of news from the Hormuz will first impact rates, then valuations.

Every day the Strait stays closed, the ceiling stays pressed down.

When oil prices retreat, the biggest beneficiaries won't be the leaders, but the majority of stocks suppressed for seven weeks. The list and positions are on the website.

Ultimately, Americans vote at the gas pump, the Fed hikes rates watching the gas pump, and the ceiling for U.S. equities hangs on the gas station price sign.

[For next week's outlook and specific portfolio details, please visit the website]