(Bloomberg) — Stocks fell as traders trimmed bets on Federal Reserve rate cuts, sending Treasury 10-year yields above 4%. Brent crude jumped to $80 a barrel, with mounting tensions in the Middle East raising speculation that Israel may attack Iran’s oil infrastructure.

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In the wake of surprisingly strong job growth for September, expectations for a continued slowdown in inflation reinforced speculation that policymakers will opt for a smaller rate reduction next month. Money markets no longer see another half-point cut this year, while a quarter-point reduction in November that was once seen as certain is now priced at about an 80% probability.

“Friday’s strong jobs report not only appeared to kill any chance of a 50-basis-point rate cut in November, it kickstarted chatter about the Fed leaving rates unchanged if economic data continues to come in hotter than expected,” said Chris Larkin at E*Trade from Morgan Stanley. “But as last week showed, geopolitics can’t be ignored.”

To Dave Sekera at Morningstar, if there is any further geopolitical escalation, that would potentially spur the risk-off trade — with growth shares underperforming value ones.

“Typically, in a risk-off trade, you’re going to see rotation into defense stocks, but I’d be careful if you’re an investor today,” he said. “Some of the defensive sectors today are already overvalued. Unlike a typical risk-off trade, I think oil stocks would go up.”

The S&P 500 fell to around 5,725. Amazon.com Inc. slipped after a rare analyst downgrade that cited concerns over margin trends into next year, which growth in the cloud computing business is unlikely to compensate for. Pfizer Inc. climbed on a news report that activist investor Starboard Value has taken a stake of about $1 billion in the drugmaker.

Treasury 10-year yields rose five basis points to 4.01%. West Texas Intermediate crude climbed 3.7% to $77.12 a barrel.

Despite the drop in stocks, two of Wall Street’s top strategists have turned more optimistic on signs of a robust labor market, economic resilience and easing interest rates.

Morgan Stanley’s Michael Wilson raised his view on so-called cyclical stocks relative to safer defensive peers, noting Friday’s blowout payrolls data and expectations of more cuts from the Fed. His peer at Goldman Sachs Group Inc., David Kostin upgraded his 12-month target for the benchmark to 6,300 points from 6,000, implying gains of about 10% from current levels.

“The week ahead is a pivotal one for markets, with key CPI data and the start of earnings season, and we expect these events to confirm our bullish stance on markets and justify our expectations for the S&P 500 to reach 6,150 by year-end,” said James Demmert at Main Street Research. “The strong jobs numbers from Friday are a reminder to investors that the economy is vibrant, and recession risk is not a factor.”

“The increasing probability that US economic performance will continue to be ‘hot’ going into 2025 and that the Fed will tolerate this heat, provided inflation isn’t reaccelerating, bodes well for risk assets,” said Jason Draho at UBS Global Wealth Management.

But navigating such an environment is not without challenges, he noted.

“While investors welcomed the strong jobs report because it eased concerns about a cooling labor market, data that suggests the economy is re-accelerating will stoke fears that a hot economy is at risk of overheating,” Draho said.

Aside from the macroeconomic picture, traders will be wading through corporate results this week.

The third-quarter earnings season is expected to be fertile ground for investors who take an active approach to managing money, according to strategists at Bank of America Corp.

Options market is pricing in biggest post-earnings implied move at the single stock level in BofA data history since 2021, while S&P 500 Index volatility remains low, team led by Ohsung Kwon said Monday in a note to clients.

“This upcoming earnings season is set to be a great environment for stock pickers,” he noted.

Financial sector earnings kick off Friday — with reports from JPMorgan Chase & Co., Wells Fargo & Co. and Blackrock Inc. Their net interest income outlook and capital markets revenue are in focus following September’s Fed rate cut, Bloomberg Intelligence said.

Delta Air Lines Inc., the first major US airline to report this quarter, should provide further insight into travel demand following reports from Airbnb Inc. and Booking Holdings Inc. that flagged a pullback in vacation spending.

Corporate Highlights:

• Chevron Corp. agreed to sell stakes in oil sands and shale assets in Western Canada to Canadian Natural Resources Ltd. for $6.5 billion.

• Casino stocks gained after Wynn Resorts Ltd. received a commercial gaming operator’s license in the United Arab Emirates.

• Air Products and Chemicals Inc. climbed after the Wall Street Journal reported activist investor Mantle Ridge has a more than $1 billion stake in the company, citing people familiar with the matter.

• Apollo Global Management Inc. agreed to buy Barnes Group Inc. in an all-cash transaction that values the technology and aerospace manufacturer at about $3.6 billion.

• Rivus Pharmaceuticals Inc., a drug developer focused on obesity treatments, is considering a US initial public offering as soon as 2024, according to people with knowledge of the matter.

• Continental AG has lined up banks to help with the separation of its struggling car parts business, according to people familiar with the matter, moving ahead with the plans despite recalls related to faulty braking systems it supplied.

Key events this week:

• Fed speakers include Raphael Bostic, Susan Collins, Philip Jefferson and Adriana Kugler, Tuesday

• Fed minutes, Wednesday

• Fed speakers include Lorie Logan, Raphael Bostic, Austan Goolsbee and Mary Daly, Wednesday

• US initial jobless claims, CPI, Thursday

• Fed speakers include John Williams and Thomas Barkin, Thursday

• US PPI, University of Michigan consumer sentiment, Friday

• JPMorgan, Wells Fargo kick off earnings season for the big Wall Street banks, Friday

• Fed speakers include Lorie Logan, Austan Goolsbee and Michelle Bowman, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.4% as of 1:28 p.m. New York time

• The Nasdaq 100 fell 0.4%

• The Dow Jones Industrial Average fell 0.5%

• The MSCI World Index fell 0.1%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0984

• The British pound fell 0.2% to $1.3095

• The Japanese yen rose 0.5% to 147.98 per dollar

Cryptocurrencies

• Bitcoin rose 1.7% to $63,704.34

• Ether rose 1.4% to $2,473.92

Bonds

• The yield on 10-year Treasuries advanced five basis points to 4.01%

• Germany’s 10-year yield advanced five basis points to 2.26%

• Britain’s 10-year yield advanced eight basis points to 4.21%

Commodities

• West Texas Intermediate crude rose 3.7% to $77.12 a barrel

• Spot gold fell 0.3% to $2,646.38 an ounce

This story was produced with the assistance of Bloomberg Automation.

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