US equities staged a robust recovery on Friday, snapping a four-day losing streak as crude oil prices retreated from their recent surge. The Dow Jones Industrial Average climbed 520 points, or 1%, while the S&P 500 advanced 0.9% and the Nasdaq Composite added 0.8%. The rebound marked the end of the Dow's longest slide since late April.
The pullback in oil prices provided a much-needed respite for investors, who had been grappling with escalating tensions in the Middle East and their potential impact on energy supplies. West Texas Intermediate futures fell 3% to $99.28 per barrel, while Brent crude dropped 3.1% to $104.32. Despite Friday's decline, both benchmarks remained on track for weekly gains of approximately 8%, underscoring the volatility that has gripped the energy market.
The retreat below the psychologically significant $100 level for WTI helped ease immediate concerns about inflation and its drag on consumer spending. However, the broader trend of higher energy costs remains a key risk for the economic outlook, as the prolonged conflict between the US and Iran continues to threaten supply chains.
Inflation data fuels rate hike bets
Friday's market rally unfolded despite a mixed August consumer price index (CPI) report that reinforced expectations for tighter monetary policy. The headline CPI rose 0.4% month-over-month, bringing the annual rate to 3.4%, both in line with Dow Jones estimates. Core CPI, which strips out volatile food and energy prices, increased 0.3% from the previous month, slightly above the 0.2% forecast. The annual core rate held at 2.4%, matching expectations.
The report was the final major inflation reading before the Federal Reserve's policy meeting next week, which concludes Wednesday with an interest rate decision. Following the data, traders sharply increased their bets on a 25-basis-point rate hike, with CME Group's FedWatch tool showing a probability of around 90%, up from lower levels earlier in the week.
Energy prices were a significant driver of the headline increase, with gasoline surging 3.9% and accounting for more than one-third of the overall CPI gain. The broader energy index rose 2.1% for the month and was up 16.3% year-over-year. Food prices edged up 0.1%, while food-at-home costs were unchanged, leaving the food index 2.7% higher than a year ago.
Investors look beyond near-term headwinds
The combination of elevated oil prices and renewed rate-hike expectations has created a challenging environment for equities, particularly for growth and technology stocks that are sensitive to borrowing costs. However, Friday's decline in crude prices allowed investors to look past the immediate pressure from the inflation data.
Analysts at Wells Fargo Investment Institute argue that recent market weakness may not derail the broader upward trend. They point to robust corporate profitability and capital expenditure trends as supportive factors for stocks through the remainder of the year and into 2027. "We believe investors will look beyond the uncertainties of higher interest rates, elevated oil prices and midterm elections to focus on continued economic growth and robust earnings," said Douglas Beath of Wells Fargo.
While September is historically a weak month for equity returns, the firm's outlook suggests that the current pullback could be a buying opportunity. The market's ability to absorb the latest inflation data and oil price swings will be tested in the coming weeks as investors digest the Fed's decision and monitor geopolitical developments.
For more on how inflation and oil are affecting markets, see our coverage of the Dow's earlier slide and oil's impact on crypto. Additionally, gold's weekly decline highlights the complex interplay between inflation and safe-haven demand.
This article is for informational purposes only and does not constitute financial advice.
