The US equity market continues to play Russian roulette: both bears and bulls can be disappointed by a single shot. The S&P 500 spent most of the session in the red, but a report that the United States and Iran are exploring a phased reopening of the Strait of Hormuz pushed Brent back below $100/bbl and allowed the index to close the gap that formed after the opening bell.

The S&P 500 is still trading tug-of-war style. The return of the AI boom led by Meta Platforms and its new AI agent is pulling the index higher. Meta shares are up 36% in September, marking their best monthly performance since 2013, and market cap is on the verge of $2 trillion.

Meta Platforms monthly performance

On the other side, the index is pressured by worries about high Treasury yields, inflation, and Fed policy. Those forces weaken equity fundamentals, force stocks to compete with the bond market for investor capital, and potentially reduce corporate profits via higher costs. All these bearish drivers have a common root — oil. Right now, it is effectively running the markets.

The correlation between crude and bond yields is approaching record levels. With 10-year yields back at 2007 highs and 30-year yields at peaks not seen since 2004, while Brent has rolled over, uncomfortable questions arise: have yields climbed too far, threatening not only equity markets but the broader US economy?

Correlation dynamics: US Treasury yields and oil

The answer depends on oil's ability to tolerate higher rates. Thanks to AI-driven productivity gains, higher rates may cool the economy less than in the past. I believe the S&P 500 can withstand a higher cost of capital.

JP Morgan argues equities can still rally even as bond yields lift the bar for valuations, thanks to a so-called earnings supercycle. Investors simply need to be selective in their equity picks.

Gama Asset Management sees the most likely near-term outcome amid the sharp Treasury sell-off as consolidation for the S&P 500. The index can resume its rally once bond yields stabilize. That outcome is logical. Consolidation may also reflect rotation dynamics — a swing back into tech from rate-sensitive sectors.

Technically, the daily chart shows that the S&P 500 is fighting for the upper boundary of a descending trading channel. To cement their edge, bulls need to push through fair value at 7,710, which would justify adding long positions.