Why this report matters
The U.S. administration may have expected a swift resolution in the conflict with Iran, but the resulting surge in oil prices has materially altered policy expectations for the months ahead, particularly at a time when several U.S. equity sectors were already showing signs of technical weakness.
In this report, we examine the true implications of higher oil prices for inflation, using our regression model to estimate where U.S. CPI is realistically headed. This model accurately anticipated the sharp decline in inflation in 2023, at a time when most Wall Street economists were forecasting persistently high inflation and a U.S. recession, while our model pointed to the opposite outcome.
We also analyze what this shift could mean for Federal Reserve policy, the S&P 500 outlook, and which sectors are likely to be most affected. In addition, we outline the key levels where the S&P 500 could trade under this evolving macro backdrop.
This report builds on our February 17 S&P 500 Chart Book, which analyzes 28 charts across daily, weekly, and monthly timeframes, and is complemented by our ETF and Macro ETF Chart Book, featuring another 28 charts covering the most important sector and macro ETFs. Together, these frameworks help investors quickly identify where momentum is shifting across markets and how to position for the road ahead.
If you care about U.S. equities, global stocks, or commodities such as oil, this report will be valuable to you.
Included: SP500 Chart book (28 charts with daily, weekly and monthly data)
Included: ETF Chart book (US sectors, international/macro ETFs)
SP500 Index
Main argument
(1) U.S. inflation could jump to 3.36%, causing the Fed to hike
Based on our U.S. CPI–energy regression model, the current level of oil prices, if sustained, would push the fair value of CPI from 2.43% to roughly 3.36%. This represents a meaningful increase and would likely prompt the Federal Reserve to consider tighter policy to anchor inflation expectations. For the first time since December 2022, our model is again signaling the risk of rate hikes, while simultaneously pricing out any near-term rate cuts.
Regression Model expects CPI to jump from 2.43% to 3.36% if Oil stays here
This marks a notable shift in the macro-outlook. In December 2022, consensus among Wall Street economists was that a U.S. recession in 2023 was highly likely due to elevated inflation. Our model, however, pointed to a sharp decline in CPI, suggesting a strong risk-on rally, which ultimately helped lift both Bitcoin and the Nasdaq, as indeed occurred.
CPI vs. our inflation model
Today, the situation appears reversed: without a meaningful decline in inflation over the coming months, the Federal Reserve is likely to remain cautious, and the previously expected tailwind from future rate cuts is fading. This could prove to be a challenging communication environment for the newly appointed Federal Reserve Chair, Kevin Warsh, if confirmed, as markets are likely to test his policy stance almost immediately.
Our model starts to price in rate HIKES - first time since December 2022
The implications for markets are significant. Higher energy prices, rising interest rates, and weaker consumer spending represent a challenging combination for risk assets. These pressures affect most sectors of the equity market, particularly those sensitive to energy costs and borrowing conditions. As a result, we believe this macro backdrop will continue to weigh on equities, reinforcing our view that investors should remain underweight stocks for now.
These risks could also weigh on private equity and debt-financed assets, which rely heavily on low borrowing costs and stable consumer demand. In a higher-rate environment, pressure on valuations and refinancing costs may trigger even more redemptions and forced adjustments, potentially creating a negative feedback loop that amplifies economic weakness. The recent underperformance of the Financial Sector ETF (XLF) may already be reflecting these emerging stresses.
(2) SP500 Technical Overview
On February 17, we highlighted that negative divergences between price and technical indicators were likely to increase downside risk for the S&P 500, with a potential 10% decline toward the 6,207 level. At the same time, our S&P 500 trend model had flipped to bearish, suggesting that trend-following funds (CTAs) could begin shifting from long to short positioning. While these divergences have eased somewhat from their most extreme levels, they have not yet reached the threshold that would typically signal a renewed uptrend.
SP500 could drop to 6,100/6,200
As long as the S&P 500 remains below the trend signal at 6,891, downside risks remain elevated. The weekly stochastic indicator, currently at 56%, is still well above the levels typically associated with cyclical correction lows (20%), which tend to occur roughly every two years. With the index now approaching its 200-day moving average, investors will increasingly reassess their allocations should prices break below this key technical level.
In such a scenario, attention would likely shift toward the 23.6% Fibonacci retracement near 6,143-6,207, which coincides with the pre–Liberation Day high from February 2025. A deeper correction could target the 5,690 level, which represents the 38.2% retracement and aligns with support from the July 2024 high. In short, the S&P 500 remains in a developing downtrend, with weakening technical momentum, a challenged 200-day moving average, and weekly reversal indicators that have not yet declined far enough to signal a durable bottom.
(3) SP500 Sector and ETF Overview
Nearly all S&P 500 sectors are currently trading below their shorter-term 30-day moving averages, underscoring the broad-based weakness in the market. The Energy sector (XLE) is a notable exception, supported by elevated oil prices. More importantly, however, cyclical sectors such as Financials (XLF) and Consumer Discretionary (XLY) are experiencing pronounced corrections, while even traditionally defensive sectors like Consumer Staples (XLP) have begun to weaken.
Unless oil prices decline meaningfully in the near term, the current environment of heightened geopolitical uncertainty, the repricing of Fed rate-cut expectations, concerns about slowing U.S. job growth, and emerging weakness in credit markets is likely to continue weighing on consumption. As a result, these sectors may remain under pressure until the S&P 500 approaches a more significant technical support level.
Crucially, the absence of a rotation into defensive sectors, such as Healthcare (XLV), also suggests that investors currently have few places to hide in equities. In such an environment, the more prudent positioning may be to reduce risk exposure, consider tactical short positions, or temporarily allocate capital to U.S. dollars until market conditions stabilize.
This cautious outlook is also reflected in country ETFs, many of which have failed to reestablish their uptrends following the recent correction. At the same time, the U.S. dollar remains firmly in an uptrend, with the $96 level acting as support for the third time since the June 2025 low, reinforcing the strength of the currency backdrop.
While silver futures continue to trend higher, the stronger dollar is beginning to weigh on gold prices, and rising bond yields are likely to create additional pressure on interest-rate-sensitive sectors. This dynamic could ultimately feed back into weaker consumer spending, particularly in economies and sectors that are already vulnerable to higher energy costs and tighter financial conditions.
Moreover, with the ongoing AI-driven data center buildout significantly increasing energy demand, sustained high oil prices could have a broader impact than during previous energy spikes. Technology companies, which are increasingly exposed to energy-intensive infrastructure investments, may prove more sensitive to rising energy costs than in past cycles.
Conclusion
This report is critical because it highlights a fundamental shift in the macro landscape, with inflationary risks re-emerging, potentially forcing the Fed to pivot from expected rate cuts to renewed rate hikes or at least a prolonged pause. As sustained high oil prices threaten to push CPI toward 3.36%, the resulting "higher-for-longer" interest rate environment creates a negative feedback loop for risk assets by increasing borrowing costs and weakening consumer demand.
Investors should adopt a defensive and risk-averse posture. Reducing overall risk exposure and remaining underweight in stocks until technical indicators signal a durable bottom. Tactical capital allocation into the U.S. Dollar, which remains in a firm uptrend and acts as a safe haven.
The sectors most exposed to this environment are real estate and consumer discretionary (XLY). Over the past month, the S&P 500 has declined by 2.7%, while consumer discretionary has fallen 4.6%, already showing clear signs of underperformance. Given the pressures from higher inflation, rising borrowing costs, and weakening consumer spending, this relative weakness is likely to persist.
However, with financials declining by 5.8% over the past month, the weakness is becoming increasingly visible in sectors that typically serve as key barometers of economic health. This suggests that underlying conditions in the U.S. economy may be weaker than headline indicators suggest, a deterioration that has not yet been fully reflected in the broader stock market indices.
Disclaimer: This email and any attached research are for informational purposes only and do not constitute investment advice, financial advice, or a recommendation to buy or sell any assets. 10x Research does not provide personalized investment advice and is not registered as a broker-dealer or investment adviser. Views are the authors’ own and subject to change. Please consult a qualified professional before making financial decisions. ©10x Research.
