Stocks closed lower on Friday and mostly lower for the week with only the Dow notching a weekly gain.

Last week's hotter-than-expected CPI (retail) and PPI (wholesale) inflation reports weighed on stocks.

But ironically, the 10-year Treasury yield fell for the week, which started at 5.24% (after getting as high as 5.35% the week before), and ended at 5.10% on Friday.

Could it be that the bond market has finished pricing in the expected rate hikes (we got a quarter-point hike in September, and the market is expecting another one in December before calling it quits), and the spike in yields (and subsequent stock pullback) has run its course?

I think that's a real possibility. And if not fully over, I believe it's closer to the end than not. Because yields won't rise forever. And I'm not expecting the Fed Funds Rate (FFR) to rise much more than expected either. Plus, with the Fed Funds Rate (FFR) at 3.88% midpoint, and the 10-yr yield at 5.10%, the spread is 122 basis points. Historically, over the past 40 years (1985-2025), the spread between the FFR and the 10-yr has been 100 to 150 bps, with the median at 120. So, there's nothing ominous about the recent rise in yields. And I contend this is simply a reversion to the long-run median spread of 120 bps.

Oil rose last week as a result of increased tensions in the Middle East, which only exacerbated inflation fears. But it's important to remember that Middle East crude exports have risen to 16.3M barrels per day, which is the highest since the war began. That's approximately 80% of pre-war levels. Hormuz volume is only at 40% of pre-war levels with Iran exports effectively at zero. But other Middle East routes used by Saudi Arabia, the UAE and Oman, to name a few, have increased significantly, putting combined shipments at just 20% below the pre-war baseline. Additionally, the G7 announced they would be releasing as much as 100 million barrels of diesel fuel and crude oil over the course of four months.

And all of the above should help cap oil. Ease inflation. And help put a lid on rates.

Q3 earnings season has begun, which got started with big banks last week. By and large, it was another impressive quarter for them, even record quarters for some. Although, many were met with disappointing price action afterwards. But I'll chalk that up to poor timing, as they happened to release strong numbers while the market was pulling back. But that doesn't erase the growth they've seen.

And S&P earnings for Q3 are expected to show another stellar gain with a 24.6% EPS growth rate. (BTW, Q4'26 is forecast at 27.4%, and Q1'27 is forecast at 21.7%. So, the outstanding performance is expected to continue for some time.)

Earnings season heats up this week with 422 stocks set to report, including two Magnificent 7 companies (Meta and Tesla), and other high-profile names like Netflix, Texas Instruments, IBM, Abbott Labs, and Western Digital.

And it all happens against a backdrop of strong bullish seasonal tendencies. Including October typically being the best month for stocks in midterm years with an average gain of 3.0%. So, the market has a lot of catching up to do.

See you tomorrow,