Conventional wisdom has it that healthy equity markets mirror a strong economy and consequently buoyant oil demand. Yet, oil has decoupled from equities in the past year globally and more discernibly in the U.S. This trend is clearly exhibited on the chart above. The ratio between the Dow Jones Industrial Average Index and the U.S. flagship Crude Oil contract, WTI (equity value divided by crude oil value) has shot up from below 400 last September to over 500 mid-August. The same trend is perceptible on the Nasdaq Composite Index as its ratio to WTI has risen from around 150 to 230 during the same period.

The relative stellar performance of U.S. stocks is the function of the ongoing popularity of the technological sector triggered by the emergence of Artificial Intelligence (AI) and the perception that the world’s biggest economy will be able to achieve a soft landing in its fight against inflation and avoid recession. At the same time U.S. oil producers are happily filling in the gap left on the supply side of the oil equation by the OPEC+ producer alliance creating adequate supply, which weighs on oil prices.

The dilemma is whether this discrepancy between equities and oil is the new norm or a correction or possibly a trend reversal is impending. It is probably the latter and when it comes it will present itself in one of two ways: either equities rising slower or falling faster than oil. It might just happen when the AI bubble bursts, the timing of which is anything but clear at this stage. More importantly, it will be intriguing to observe the market reaction to a potential Fed rate cut, which according to the CME FedWatch Tool will plausibly take place at the next central bank meeting on September 17-18. The lowering of the cost of borrowing might weaken the dollar and lead to capital outflows imposing relative downside pressure on equities. Simultaneously, oil demand ought to remain resilient because of falling rates and the weaker greenback leading to a salient narrowing of the chasm between stocks and oil.