In light of Mojtaba Khamenei’s avowed determination to keep the Strait of Hormuz closed in perpetuity, I suppose it’s time to ask what a prolonged period of elevated crude prices might mean for corporate profits.
Remember: Oil’s an input cost for pretty much everything, directly or indirectly, to a greater or lesser degree. Beyond that, meaningfully higher prices at the pump are a headwind to consumer spending as gas eats up a larger share of scarce disposable income.
The good news is that “modestly” (however you want to define that) higher oil prices which recede in relatively short order — and naive as this might sound today, I still think that’s the most plausible base case — shouldn’t materially impact aggregate S&P 500 profits.
The bad news is the odds of something longer and more severe are growing, and as Goldman’s Ben Snider cautioned, “a sustained period of extreme oil disruption that weighs on economic growth” would drag earnings.
Goldman’s house “rule of thumb” suggests a $10/bbl sustained jump in oil prices would reduce US GDP growth this year by 10bps and push up core CPI by half that. So, in a hypothetical worst-case where oil sustains a $40 increase, that’s half a point worth of growth and 20bps of upside for underlying inflation.
Mechanically, that prospective worst-case isn’t a death knell for earnings, but the problem with this sort of analysis is always the same: It can’t, and therefore doesn’t, account for second-order effects.
So, for example, even a modest slowdown can trigger meaningful job losses, which can in turn drag a spending impulse that’s already under pressure from higher inflation. That slowdown in demand can prompt additional job losses, further undermining consumption and so on, in a self-fulfilling prophecy.
And then there’s the psychological impact of prolonged macro ambiguity. “In addition to the potential drag on economic and earnings growth from higher oil prices, a sustained major increase in uncertainty could undermine corporate confidence and the nascent rebound in industrial activity that has contributed to recent rallies in many ‘old economy’ cyclicals,” Snider wrote.
Of course, selling stocks based on the assumption that asset prices will exhibit sympathy for humanity in moments of crisis fails to recognize that, as I never tire of reminding readers, “the market has no heart.”
The figures above, from the same Goldman note, show you the geopolitical equivalent of the EPU Index (on the left) along with mean and median returns for the S&P during seven major post-War geopolitical shocks (on the right).
“The historical impact of geopolitical shocks on equity prices has typically been short-lived,” Snider went on. “During seven spikes in the Geopolitical Risk Index since 1950, the S&P 500 fell by an average of 4% during the first week and equities rebounded within the subsequent month.”
Needless to say, seven’s a very small sample, and even if it were 700, it wouldn’t so much matter because the nature of geopolitical shocks is such that they can’t be compared on an apples-to-apples basis for the purposes of saying anything meaningful about the outlook for stock prices.
On Thursday, Scott Bessent told Sky News the US will provide warship escorts for oil tankers “as soon as it’s militarily possible.” That vague promise is worth about as much as war’s good for.
“Of course, selling stocks based on the assumption that asset prices will exhibit sympathy for humanity in moments of crisis fails to recognize that, as I never tire of reminding readers, “the market has no heart.”
Street and investor commentary barely acknowledges the heavily negative impact of a surge in fertilizer prices will have on farmers in many places in many places around the world.
Unless if higher fertilizer prices weigh on margins for US and EU farmers enough to discourage them from purchasing expensive farm machinery.
fertilizer? We’ll make certain to keep on eye on that one!
Heard a funny saying today. “It takes two to TACO.” Trump has probably never experienced compelled . . . um . . . dancing.
https://www.google.com/search?q=neil+young+sugar+mountain+lyrics&sca_esv=3d359356975f5722&sxsrf=ANbL-n7RK3DA9bVkyXz5X8Oh8LxQGF56Lg%3A1773371812180&ei=pIGzaYLXCsbYkPIP97ju8Qk&oq=neil+young+mountain+s&gs_lp=Egxnd3Mtd2l6LXNlcnAiFW5laWwgeW91bmcgbW91bnRhaW4gcyoCCAEyCxAuGIAEGJECGIoFMgYQABgWGB4yBhAAGBYYHjIGEAAYFhgeMgYQABgWGB4yBhAAGBYYHjIGEAAYFhgeMgYQABgWGB4yBhAAGBYYHjIGEAAYFhgeSKGOAVC8DFjQanABeACQAQCYAakDoAHKOqoBCDItMTUuNy4zuAEByAEA-AEBmAIToAK9R8ICChAAGLADGNYEGEfCAg4QABiwAxjkAhjWBNgBAcICFxAuGLADGLgGGNgCGMgDGNoGGNwG2AEBwgIEECMYJ8ICCBAAGIAEGKIEwgIFEAAY7wXCAgUQABiABMICCxAAGIAEGIYDGIoFwgILEAAYgAQYkQIYigXCAgUQLhiABMICChAuGIAEGBQYhwLCAgoQABiABBgUGIcCwgIOEAAYgAQYkQIYsQMYigXCAgsQABiABBixAxiDAcICCBAAGIAEGLEDwgIZEC4YgAQYFBiHAhiXBRjcBBjeBBjgBNgBAcICGhAuGIAEGJECGIoFGJcFGNwEGN4EGOAE2AEBmAMAiAYBkAYPugYGCAEQARgJkgcOMS4wLjEyLjIuMy45LTGgB6f0AbIHCDItMTIuMi4zuAe0J8IHCDItMy4xNS4xyAfGAYAIAA&sclient=gws-wiz-serp
1966 my friends.
!966!
https://genius.com/Buffalo-springfield-for-what-its-worth-lyrics
yeah, also the underlying reference requires a certain degree of consent, something else Great Leader is not big on
In the rule of thumb, what time frame constitutes a ‘sustained’ spike in oil prices? Does 4 months count? 6? 1 yr? Indefinite?
Asking as reports indicate mines are in the straight. Which would seem to imply months long time frame to reopening traffic.
The timing of this energy shock is particularly inconvenient given that job losses in 2026 were already telegraphed. A sustained shock would only exacerbate those losses and increase the cyclical economic unwind. Then throw illegal but sustained tariffs on top of that and we’re looking at a pretty nasty case of stagflation. This of course would all be made much worse if Iranian sympathizers decide to throw some support their way similarily to how North Korea is fighting alongside Russia in Ukraine.
i think the ai buildout is what could really be different this time. energy consumption was already forecast to increase w/ the buildout and then operation of data centers. add to that dynamic a tighter international energy supply resulting from the closure of hormuz, and i think the price of oil, and the upward pressure on inflation, could prove far more challenging for our economy than the market is signaling.
Thanks for the Edwin Starr earworm.