Three key factors will determine if the Wall Street rally has legs

Wall Street has returned to a positive mood as the new week begins. The S&P 500 climbed 2.3% on Monday, its strongest session since April, driven by lower oil prices and expectations that the US-Iran conflict may ease, giving traders a reason to buy back into equities.

That makes sense. Reduced oil costs help relieve some inflationary pressure, which in turn eases the burden on corporate margins and consumer spending. That is positive for stocks, particularly after the sharp declines seen last week.

But what occurs once that optimism is fully reflected in market prices? A possible resolution of the Middle East crisis removes a significant uncertainty for stocks. Yet it does not automatically provide a new catalyst for continued upward movement.

Therefore, I believe three key factors are worth monitoring to assess whether this latest upturn can be sustained.

The first is that Treasury yields must cooperate as well.

The 10-year Treasury yield sits just under 4.90%, which hardly encourages investors to abandon caution. If oil prices continue to drop but bond yields remain high, any actual benefit to equity valuations might prove limited once the situation stabilises.

In addition, the fiscal situation in Washington is not helping. Ongoing deficits and substantial borrowing needs could keep upward pressure on long-term yields, even as geopolitical risks diminish.

Moreover, cheaper oil alone will not immediately shift the Federal Reserve's stance. Markets continue to price in roughly an 84% probability of a rate hike in December, meaning there are still hawkish signals for traders to navigate. The first test of that arrives later today with the US CPI report.

The second factor is whether the stock rally can expand beyond the usual names.

The bounce on Monday was certainly encouraging, with all 11 S&P 500 sectors finishing higher and the Russell 2000 advancing 3.1%. The key question now is whether that momentum can persist.

If small-cap stocks, industrial companies and consumer discretionary shares continue to take part, that would indicate investors are betting on a healthier economic outlook rather than merely chasing another tech rebound. A rally driven by an increasingly narrow group of stocks would tell a very different story.

And finally, earnings must also deliver and justify the excitement.

The debate over AI spending has not gone away simply because oil prices are falling. Investors still need strong evidence that huge capital expenditure commitments will eventually translate into sustainable profit growth. But if valuations rise faster than earnings expectations, the market becomes more susceptible to another disappointment.

That is the broader picture I will be monitoring going forward, even as geopolitical tensions start to ease.

A genuine reduction in the US-Iran conflict could certainly set the stage for a sustained recovery. However, I would also like to see falling bond yields, broader equity participation and stronger earnings expectations to confirm that optimism.

Otherwise, we may end up in a situation where market participants have already priced in the good news but have not yet determined what comes next. And that marks the point where the easy part of the rally is over.