After oil prices fall out of the "danger zone," how do U.S. stocks usually perform? History suggests a more optimistic outlook.

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International oil prices have recently fallen sharply, breaking below key long-term moving averages and providing important support to the stock market. Historical experience shows that after such a technical correction in oil prices, the average rise in the US stock market over the next 12 months can reach about 17%.

Julian Emanuel, Senior Managing Director at Evercore ISI, pointed out in his latest research report that WTI crude oil has significantly fallen from its high levels a few months ago, currently breaking below the 24-month moving average and completing one of the fastest moving average reversions in history. He defines the period when oil prices are far above the moving average as the "danger zone" and believes that moving out of this zone will provide sustained tailwinds for the economy and the stock market.

From a broader perspective, the decline in oil prices not only improves market sentiment but also substantively boosts consumer purchasing power—US gasoline prices have fallen to below $4 per gallon and continue to decline, helping ease downward economic pressures. Driven by this, US stock index futures climbed on Monday, treasury yields edged lower, and overall market sentiment was optimistic.

Oil prices break below the 24-month moving average, marking a significant historical turning point

According to Emanuel’s research, WTI crude oil prices were previously about 40% above their 24-month moving average (24-MMA). Historical experience shows that, when oil prices remain 35%-50% above the 24-month moving average for a sustained period, the stock market often comes under pressure and risk asset returns weaken significantly.

Now, with oil prices rapidly falling and breaking below that moving average, this suppressive factor is systematically fading. Emanuel pointed out that this round of mean reversion is occurring at a historically fast pace, which means the release of the energy cost shock is more intense, further reinforcing the improving macro environment.

Historically, after oil prices complete a correction of this level, the S&P 500 index rises by an average of about 17% over the next 12 months, while volatility declines and market structure stabilizes.

Emanuel further pointed out that during this phase, the information technology and consumer discretionary sectors typically outperform, and the Nasdaq index as a whole often outpaces the broader market. This characteristic resonates somewhat with the current AI-driven growth stock rally.

Solid economic fundamentals, positive cycle between consumption and employment

Emanuel emphasizes that current market optimism is not only based on technical signals; fundamentals are also supportive.

“The drop in oil prices itself reduces economic resistance that could trigger a recession, improves consumer purchasing power, and the virtuous cycle between a robust job market and consumption continues,” he said. Against this backdrop, inflationary pressures are expected to ease further, energy prices no longer act as a core constraint, the Federal Reserve’s monetary policy space expands, and macro uncertainty decreases.

Meanwhile, the market has also seen another noteworthy structural signal. Callum Thomas, founder and research director at Topdown Charts, pointed out that although the Russell 2000 index recently reached a record high, with gains of over 20% since 2026, fund inflows remain at their lowest range in the past 20 years.

Thomas said that against the backdrop of rising passive investment and large tech stocks dominating the market for an extended period, small-cap stocks have long been underweighted. “This is a classic contrarian signal,” he pointed out, when prices rise but funds aren’t crowded in, it often means there is still room for future reallocation.

Risk warning and disclaimerThe market is risky, and investment should be cautious. This article does not constitute personal investment advice, nor does it take into account specific investment objectives, financial circumstances, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Investment based on this is at your own risk. ```