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Stocks snapped higher Monday morning as Wall Street welcomed a sharp drop in oil prices and a temporary pause in fighting between the United States and Iran. The Dow Jones Industrial Average jumped more than 400 points early in the session, giving traders a rare burst of relief after weeks of geopolitical stress and market fatigue.

The rally broadened beyond blue chips, with the S&P 500 and Nasdaq Composite also moving higher. Investors appeared willing to step back into risk assets as crude prices retreated and bond yields eased.

Brent crude for September delivery fell more than 6% to roughly $90 a barrel, while U.S. West Texas Intermediate dropped nearly 6% to about $84. The decline helped cool inflation fears, even as the energy market remains highly sensitive to another flare up in the Middle East.

The pause in U.S. and Iranian hostilities gave markets room to breathe, but nobody should mistake cheaper oil for peace. Tensions elsewhere remained elevated after Ukraine struck an Iranian commercial vessel in the Caspian Sea, prompting Tehran to accuse Kyiv of a “hostile and criminal act.”

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Energy stocks were the obvious losers as crude prices sank. Chevron, ExxonMobil and ConocoPhillips traded lower, while European giants including BP, Shell and TotalEnergies also came under pressure.

Still, lower oil offered a tailwind for the broader market because it eases pressure on consumers, transportation firms and inflation sensitive sectors. It also gives the Federal Reserve slightly more breathing room as officials prepare for a closely watched interest rate decision Wednesday.

Markets largely expect the Fed to raise rates in September, but traders are still pricing in a meaningful chance of a quarter percentage point increase this week, according to CME FedWatch data. With Treasury yields slipping Monday, investors appeared to be betting that cheaper energy could soften the need for immediate tightening.

The 10 year Treasury yield fell more than 4 basis points to about 4.63%, while the 2 year yield dropped to roughly 4.30%. Those moves matter because borrowing costs are still biting households, businesses and asset valuations after years of easy money gave way to an aggressive tightening cycle.

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The rebound comes after another rough week for U.S. stocks. The S&P 500 and Nasdaq both fell Friday, while chip shares remained under pressure and uncertainty around the Iran conflict kept buyers cautious.

This week brings a heavier test than Monday’s relief rally. Amazon, Apple, Meta Platforms and Microsoft are all set to report results, and investors will be looking closely at whether the artificial intelligence boom is producing durable returns or simply burning through capital at a historic pace.

“The biggest risk is the continuation of the spend,” said Ken Mahoney, CEO of Mahoney Asset Management. “And then the problem is, if they do listen to shareholders and wind down a little bit of that spend, or reduce the growth of that spend, then the rest of the market is not going to like it.”

Alphabet remains central to that debate after its recent results raised fresh questions about AI investment. Phillip Securities upgraded the Google parent to buy, citing “robust revenue growth across core business segments”, but the firm also noted that heavy AI spending pushed free cash flow into negative territory for the first time since the company’s 2004 IPO.

“Free cash flow turned negative for the first time due to heavy AI investment, but we believe temporary FCF pressure should support stronger long term AI growth and revenue visibility,” analyst Serena Lim Yi Qi said. That is the optimistic view, although shareholders are likely to keep demanding proof that these enormous investments can generate real cash instead of just impressive headlines.

Financial stocks showed notable strength, with the State Street Financial Select Sector SPDR ETF hitting an all time high in early trading. JPMorgan Chase, Visa and Goldman Sachs all moved higher, helping reinforce the Dow’s advance.

Not every corner of the market joined the party. Warner Bros. Discovery was downgraded by Seaport Research Partners after Paramount Skydance agreed to delay its proposed acquisition of the company, adding more uncertainty to an already battered media sector.

“There was a late Friday announcement that Paramount Skydance would put the WBD acquisition on hold...with this additional delay and potential uncertainty (although if successful, there’s much more than the cost of carry to be earned), we think there are better areas to deploy capital,” a Seaport analyst said. The firm cut its second quarter earnings estimate for Warner Bros. Discovery ahead of its Aug. 6 report.

Economic data offered a less exciting picture. Durable goods orders rose only 0.3% in June, well short of expectations, with transportation equipment tumbling and demand for long lasting items cooling after a strong May.

Outside equities, precious metals found support from the weaker dollar and falling yields. Spot silver climbed nearly 3%, while spot gold advanced more than 1%, showing that investors are still keeping one foot in hard assets despite the rebound in stocks.

Helima Croft, head of global commodity strategy at RBC Capital Markets, warned that oil prices may not be telling the full story on Middle East risk. “I don’t think oil is a leading indicator of how stable the security environment is in the Middle East,” Croft told CNBC’s Squawk Box.

Global markets also rallied, with European and Asia Pacific indexes broadly higher as crude retreated. Wall Street enters the rest of the week with momentum, but between the Fed, megacap earnings and geopolitical risk, Monday’s surge still has plenty to prove.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.