Dow Jones remains under pressure as oil prices and yields rise together

The Dow Jones is retreating toward 52,786 points after falling 1.18% in the latest session. Compared with the record high established in early August, the index has lost nearly 3%.

The correction is not large enough to alter the medium-term trend, but it indicates that the market is becoming more cautious about inflation risks and monetary policy.

The main pressure comes from persistently high oil prices. Brent is approaching USD 100 per barrel, while WTI has surpassed USD 94 due to tensions in the Middle East and the risk of supply disruptions.

Higher energy prices increase production, transportation, and consumer costs, while potentially making it more difficult for the Fed to return inflation to its target.

This risk has emerged just as the market is raising expectations for a Fed interest rate hike in September. The August employment report was significantly stronger than expected, suggesting that the U.S. economy remains capable of withstanding another tightening step and lifting the probability of a 25-basis-point Fed rate hike to around 60%. Combined with inflationary pressure from oil prices, this has kept the 10-year U.S. Treasury yield close to 4.8%, thereby increasing the cost of capital and reducing the relative appeal of equities.

The Dow Jones is relatively sensitive to an environment of high interest rates and input costs because the index is heavily concentrated in companies from the industrial, financial, healthcare, and consumer sectors. However, the decline in the latest session was also amplified by company-specific movements in several stocks.

Amgen plunged after disappointing trial results from Novartis raised concerns about a similar drug being developed by Amgen, while Salesforce and Microsoft also came under selling pressure. Because the Dow Jones is weighted by share price rather than market capitalization, movements in a few high-priced components can have a significantly greater impact on the index than their actual market capitalization would suggest.

Nevertheless, the Dow Jones’ fundamental picture is not entirely negative. The index remains up nearly 10% since the beginning of the year, while earnings growth expectations for large companies have not deteriorated markedly. The current issue mainly lies in valuation, as a forward P/E ratio of nearly 20 times becomes less attractive when the 10-year U.S. Treasury yield remains around 4.8%.

In my view, the short-term outlook for the Dow Jones remains tilted toward caution. The market is facing an unfavorable combination of high oil prices, Treasury yields near 4.8%, and the possibility of a Fed rate hike in September. Therefore, even if corporate earnings have not weakened significantly, the index’s valuation could remain under pressure.

Even so, a sharp decline is not the base-case scenario. If core CPI continues to cool and the Fed leaves interest rates unchanged, the Dow Jones could stabilize as corporate earnings expectations remain relatively positive. Conversely, a higher-than-expected inflation report would reinforce the likelihood of a Fed rate hike and prolong the correction. Therefore, I expect the index to remain volatile in the short term until the inflation data and the Fed’s decision provide a clearer directional signal.