Stock watchers think the market should be able to continue to gain altitude despite a headwind from Federal Reserve interest rate hikes.

Why it matters: Rate-hiking cycles have sometimes undermined the market, leaving investors with ugly losses.

Case in point: In 2022, the S&P 500 fell 19.4% — its worst annual performance of the last 17 years — as the Fed rushed to snuff out a nasty bout of inflation that broke out during and after the COVID-19 pandemic.

• The Fed jacked up interest rates sharply in a cycle that lasted from March 2022 to July 2023.

Driving the news: The Federal Reserve launched what's expected to be a series of interest rate increases Wednesday, with a quarter-point rise.

• Chairman Kevin Warsh justified the move by saying, "The plain fact is that inflation is too high and has been for too long."
• And the S&P 500 added to its string of lackluster recent performances, declining 0.5% Wednesday.

Yes, but: Yesterday, the blue-chip index posted its biggest gain since early August. The rally was broad, including AI-related shares and software stocks as well as fuel-sensitive sectors like airlines and rate-sensitive industries like homebuilding.

Between the lines: The rally seemed driven, in part, by a second consecutive drop in crude oil prices. That cuts costs — and theoretically raises profits — for industries like airlines.

• Some attributed the oil price drop to a Reuters report that Saudi Arabia had asked China to intervene with Iran in hopes that Iran would rein in Houthi fighters after attacks on Saudi diversionary pipelines in recent days. (Beijing apparently made a call to Tehran.)
• Long-term Treasury yields also fell, with analysts suggesting that by raising short-term interest rates — against the explicit preferences of President Trump — the Fed had restored some of the institution's inflation-fighting bona fides.
• That has shrunk the uncertainty premium that helped push yields up after Warsh's widely panned performance in his late July press conference.

The big picture: The combination of falling crude oil prices and declining long-term Treasury yields is tailor-made to give stocks a lift, analysts say.

• If such salubrious market conditions continue, it could mean that the Fed won't have to raise rates too high or too quickly
• Under such a scenario, the S&P 500 may well avoid the kind of ugly drop it endured in 2022.
• Still, that's a big "if." Especially as such an important variable — energy prices — hinges on developments in the Iran war.

What they're saying: "The key risks are oil and an unexpected inflation shock," wrote Mike Wilson, Morgan Stanley's chief U.S. equity strategist.

• That combination could turn "what currently looks like a more modest policy adjustment that is preemptive in nature into what would be viewed as a more prolonged hiking cycle."

"Twenty-five basis points here and there isn't going to make too much of a difference," Steve Sosnick, chief strategist at Interactive Brokers, tells Axios. "What could go wrong is that this doesn't do enough to curb inflation and we have to really enter into a hiking cycle."

The bottom line: "That could be problematic," he says.

China's holdings of U.S. Treasury securities reached an 18-year low in July, new Treasury Department data shows.

Why it matters: It's not just China. Foreign governments are pulling back on buying Treasury securities, and hedge funds and other private investors are filling the void.

• That poses some risks to the ability of the U.S. to borrow money cheaply, as analysts say it could put upward pressure on borrowing costs.

Zoom in: China's holdings of Treasury securities fell to $618 billion in July, the lowest level since August 2008, when they were at $573.7 billion.

• The world's second-largest economy, China has been moving away from these investments for the past decade and accelerated the shift after 2022, when the U.S. froze Russian assets and prompted a lot of countries to have second thoughts about storing wealth in America.

Yes, but: China may have moved some of its Treasury holdings to non-U.S. custodians, making it hard to truly assess the situation.

• Overall, these moves have been gradual, and holdings have remained stable.

Zoom out: For years leading up to the 2008 financial crisis, central banks were "price-insensitive" buyers of Treasury debt — they saw these bonds and securities as an ultra-safe bet.

• Now, more price-sensitive hedge funds and private investors make up a larger share of buyers — these aren't all the buy-and-hold types.
• The problem? During times of stress "sharp shifts in sentiment could trigger rapid sales and systemic stress," as Brookings senior fellow Gian Maria Milesi-Ferretti wrote recently.

Then: Commodity analysts thought the disruption to the energy markets would be temporary when the Iran war started in late February.

Now: "We simply don't know how to model the endgame," JPMorgan commodity analysts said in a note yesterday.

• "We assumed there were economic red lines the U.S. administration would be unwilling to cross: $100 oil, gasoline near $5 a gallon, a 4% headline inflation or a 5-handle on the 10-year Treasury yield," JPMorgan's Natasha Kaneva, Lyuba Savinova and Artem Fakhretdinov wrote.
• "Six months later, many of those lines have been crossed, yet the exit strategy is less clear, not more."