The escalating tensions between the U.S. and Iran have once again brought the world's attention to the volatile region and its potential impact on global markets and economies. As the conflict intensifies, with the U.S. conducting nightly strikes and Iran's hardliners gaining influence, the question arises: what sectors of the stock market and economy will feel the heat?
The Impact on Wall Street
Despite the ongoing war, Wall Street seems relatively unfazed. The S&P 500 has recovered from its March lows and hit new highs, largely due to the belief that neither side wants a full-blown war, which could disrupt the global economy. However, the recent spike in oil prices and rising bond yields cannot be ignored indefinitely.
Art Hogan, chief market strategist at B. Riley Wealth, highlights the importance of the duration of these trends. If oil prices remain above $85 or $90 by the end of the year, earnings estimates for this year may need to be revised downward. In a worst-case scenario, the S&P 500 could enter a correction, but tech, the index's largest sector, may provide some insulation due to its relative independence from energy price fluctuations.
Sectors in the Spotlight
Financials and healthcare are expected to continue benefiting from secular tailwinds, regardless of higher oil prices. On the other hand, the energy sector and logistics companies heavily reliant on fuel are likely to face challenges. For instance, Ryanair's weak first-quarter profits reflect the impact of the Middle East crisis on travel bookings.
Geopolitical Outlook
Marko Papic, macro and geopolitical strategist at BCA Research, is monitoring the situation closely, particularly the potential increase in hardline influence within Iran and any troop movements by the U.S. in the region. Some market players remain optimistic, believing that the geopolitical outlook will improve in the second half of the year. JPMorgan's Mislav Matejka advises investors to use dips caused by geopolitical headlines as buying opportunities, arguing that the market has become adept at pricing such risks as transitory.
Economic Concerns
Economists like Mark Zandi of Moody's Analytics express concerns about the potential rebound in fuel prices and its impact on consumers and businesses. Zandi estimates that the average American household has already lost around $1,100 due to the war, including increased energy costs and military expenses. This has resulted in negative or flat real disposable income, typically seen during recessionary periods.
As energy prices rise, consumers are turning to savings to maintain spending, but this strategy may not be sustainable as personal saving rates decline. A resurgence of oil prices is expected to put upward pressure on the consumer price index (CPI), with May's 12-month CPI reading already at its highest level in three years. However, the 'core' CPI, excluding volatile food and energy prices, may not rise in tandem, potentially keeping the Federal Reserve from further rate hikes.
Consumer Behavior and Business Impact
Michael Gunther, analyst at Consumer Edge, suggests that companies with value-focused or driving-dependent consumer bases may face challenges if oil prices remain elevated. This could affect a range of businesses, from Dollar General to Tractor Supply. On the other hand, warehouse clubs like Costco and Sam's Club may gain market share as consumers seek value.
Retail sales data shows that consumers have continued spending despite war-related cost shocks, but there are concerns about the sustainability of this trend. Heather Long, chief economist at Navy Federal Credit Union, notes that the tax returns under President Trump's 'big, beautiful bill' provided a cushion for consumers during the initial stages of the war, but similar tailwinds may not be available if energy prices rise in the second half of the year.
Conclusion
The escalating U.S.-Iran conflict has the potential to significantly impact the stock market and economy, particularly through its influence on energy prices and consumer behavior. While Wall Street remains optimistic, the duration of these trends and their impact on earnings estimates are crucial factors to watch. The war's economic fallout highlights the interconnectedness of global markets and the challenges faced by various sectors in navigating these uncertain times.
