Earlier this week, I trudged through familiar territory in the course of reiterating that equities — and markets in general — tend to look through geopolitical developments absent a reason not to.

In other words, when something goes wrong on the geopolitical front, the burden of proof’s on the event, not stocks. The question isn’t “Why don’t equities care?” Rather, the question is “Why should they?

Sometimes the answer’s oil. If oil’s involved, stocks tend to notice. At least for a session or two. Since the onset of full-on hostilities between Israel and Hamas in October, the narrative around crude went something like this. There’s no real supply threat unless and until the situation escalates to the point that the odds of state-on-state conflict between Israel and Iran (or the US and Iran) are material.

As you might’ve noticed, direct conflict between Israel and Iran became a reality this month. Sort of. Tit-for-tat strikes on April 13 and April 19 were examples of state-on-state conflict, but somewhat paradoxically, the aim on both sides was to deescalate the situation amid immense external pressure to avoid an all-out regional war. (See my assessment of Iran’s strike here and Israel’s here.)

Of course, the situation’s still tenuous, to put it mildly. Iran served notice that domestic political realities mean the regime can no longer countenance the flagrant assassination of uniformed Iranian military commanders, particularly not when they’re inside ostensible diplomatic outposts. And Israel’s run by hardliners who’d sooner turn Tehran into a giant sheet of glass than they would entertain another fireworks show like the one the IRGC put on earlier this month. Suffice to say things could yet spiral out of control. If they did, markets would be staring at a very large supply shock.

Some readers recently inquired about the read-through for crude in such a scenario. For whatever it’s worth, BofA’s answer is that oil would rise as much as $40/bbl before OPEC ultimately stepped in to arrest the spike in a direct war situation that lasts “several months.”

The tables above give you a sense of how things might unfold under various scenarios in the bank’s thinking. A worst-case war outcome (an “expansive,” “prolonged” conflict) could see oil jump $90/bbl to ~$190 Brent and $180 WTI in the near-term.

I suppose this goes without saying, but Energy shares would be the biggest beneficiary in such a situation. Consumer stocks, on the other hand, would likely be hit hard, BofA said.

“If we see higher oil along with higher rates, the bull case for consumption is tougher to make,” the bank wrote, noting that although “some households,” particularly Boomers, “benefit from higher cash yields” and while real wage growth’s positive, there’s nevertheless “risk in discount stores as the lower-income consumer is hurt more by higher oil.”

The figure on the left, above, is clear enough: Supply shocks are bad. The figure on the right is just the beta and correlation of each sector to WTI.

In the same note, BofA observed that some funds appear under-positioned for additional Mideast escalations.

“Long-onlies have pared back exposure to Energy substantially over the last six months (-14ppt), and are now 28% Underweight relative to the S&P 500,” the bank said, adding that “exposure has been meaningfully lower only in late 2015 and during COVID.”

I’ll leave you with the full table from BofA which documents S&P performance around geopolitical shocks dating back 15 years or so (i.e., the table I mentioned in the article linked here at the outset). If nothing else, it’s entertaining.