Fidelity's Global Macro Director, Jurrien Timmer, has indicated that the longer oil prices remain elevated, the more prolonged the recent adjustment in U.S. stock markets will be. Given that oil prices are currently a primary driver of equity market movements, Timmer reviewed historical oil price shocks to assess potential future market directions. Timmer stated, "The Gulf War in 1990 drove oil prices from $41 to $100 (in today's dollars), but this shock was short-lived, resulting only in a brief 19% pullback in price-to-earnings ratios." He noted that markets are currently pricing in a similar outcome, and since the rebound has already occurred, "we need to see this narrative continue for the current gains to be sustained."
Timmer also drew a comparison to the post-pandemic inflation surge in 2022, when oil prices rose from $79 to $136 (in today's dollars). He remarked, "That oil price shock lasted longer, and consequently, the stock market adjustment was also more extended." He added that additional factors were at play during that period, "including a major Federal Reserve interest rate hiking cycle and a generational repricing of U.S. Treasury yields." For investors, Timmer emphasized that the key takeaway is that the duration of high oil prices will determine the severity of any market adjustment.
The severity of energy shocks should not be underestimated. International Energy Agency (IEA) Executive Director Fatih Birol stated on April 21 that conflict in the Middle East is pushing the globe toward the most severe energy crisis in history. Birol highlighted that this crisis, combined with fuel and natural gas supply issues stemming from the Ukraine conflict, has already had a massive impact, emphasizing that "this is indeed the biggest crisis in history." IEA data shows that by early April, oil shipments through the Strait of Hormuz fell from approximately 20 million barrels per day pre-conflict to about 3.8 million barrels per day. Even accounting for alternative routes, oil export losses from the Persian Gulf region exceed 13 million barrels per day.
Birol previously expressed hope on April 13 that there would be no need to tap strategic petroleum reserves again but confirmed the agency is prepared to act if necessary to address energy disruptions caused by the conflict. He also stated earlier this month that the current global energy crisis is "more severe than the energy crises of 1973, 1979, and 2022 combined," predicting it will accelerate the development of renewable energy, nuclear power, and electric vehicles.
Several top market analysts have warned that the Middle East conflict has effectively blockaded the Strait of Hormuz, causing the most significant crude oil supply disruption in history, a impact not yet fully reflected in current oil prices. Trafigura's Chief Economist, Saad Rahim, stated at a global commodities summit that the conflict has already disrupted 1 billion barrels of crude supply to date; if hostilities continue, this figure could rise to 1.5 billion barrels. Frederic Lasserre, Head of Analysis at Gunvor Group, pointed out that if the conflict persists for another month, the crude oil market could face critically low inventory levels. Amrita Sen, Co-founder and Director of Research at Energy Aspects, suggested that crude shipments through the Strait of Hormuz might never return to pre-war levels.
Citigroup noted earlier this week that if shipping disruptions in the Strait of Hormuz continue for another month, oil prices could climb to $110 per barrel. The bank projected that a four-week continued disruption of this key chokepoint could lead to global crude and product inventory drawdowns of approximately 1.3 billion barrels. Even if a ceasefire extension is agreed upon this week, with shipping and production gradually resuming in May, total global crude and product inventories are still expected to decline by about 900 million barrels—including 500 million barrels already lost and an additional 400 million barrels lost due to delayed restarts and conflict damage.
Citigroup further warned that a two-month disruption of the Strait of Hormuz could reduce global supply by roughly 1.7 billion barrels, potentially pushing oil prices to $130 per barrel. However, even if the conflict ends this week, Citigroup forecasts that global crude and fuel inventories will drop to an eight-year low by the end of June. The bank stated that assuming a rapid return to a supply surplus of 1 million barrels per day post-conflict, replenishing inventories could still take over two years.
While the situation in the Middle East has eased compared to earlier stages, the potential for a resumption of conflict remains due to uncertain prospects for peace talks. Oil prices have retreated from their peaks immediately following the blockade of the Strait of Hormuz but remain elevated. As of the latest update, Brent crude futures were trading at $106.68 per barrel, nearly 50% higher than pre-conflict levels on February 27.
Notably, investors have largely treated headlines related to the Middle East conflict as market noise in recent times, instead returning to embrace U.S. stocks, particularly tech shares, driven by resilient corporate earnings during the latest reporting season. However, high oil prices are suppressing the equity market's upside potential through three primary channels: costs, inflation, and policy.
Firstly, high oil prices increase corporate energy and raw material costs, thereby eroding profits. Secondly, high oil prices fuel inflation via two pathways: directly through energy consumption like gasoline and heating oil, and indirectly by raising production costs that are passed on to consumer goods, leading to broader price increases. Finally, rising inflation directly constrains central banks' monetary policy flexibility. Before the conflict, markets widely anticipated Federal Reserve rate cuts in 2026. However, with surging oil prices rekindling inflation concerns, those easing expectations have largely vanished, with discussions even emerging about potential rate hikes within the year.
Persistently high interest rates imply a lower present value for future cash flows, disproportionately impacting high-valuation stocks such as growth and technology shares. The short-term trajectory of global equity markets is highly dependent on developments in the Middle East. As long as the Strait of Hormuz remains closed to normal traffic, a substantial decline in oil prices is unlikely, suggesting continued elevated market volatility and near-term pressure on risk assets.
While institutions like Citigroup, BlackRock, and J.P. Morgan have previously expressed optimism about U.S. stocks, more cautious views have emerged recently. Goldman Sachs warned that despite the recent strong rally and new highs in U.S. stocks, the potential for further sustained gains is limited, and the risk of a correction is elevated, making the current environment less than ideal for investors to increase equity exposure.
A team led by Christian Mueller-Glissmann, Goldman Sachs' Head of Asset Allocation Research, stated in a Tuesday report that according to their framework, the risk of another equity market pullback remains high, while further upside potential is limited, concluding that "the risk-reward structure does not support increasing allocations to risk assets." Goldman's framework incorporates equity valuations, macroeconomic conditions, and policy catalysts, including risks associated with the conflict. Support from these factors for further market gains is currently waning.
Data shows the S&P 500's forward price-to-earnings ratio has climbed back above 21, while the Citi Economic Surprise Index has weakened recently, indicating reduced support from economic data relative to expectations. The Goldman team noted that valuation-driven downside risks are rising again, coinciding with a less favorable business cycle environment. The bank's economists have downgraded their assessment of the global growth-inflation mix and expect less monetary policy easing than previously anticipated, effects likely to manifest in economic data over the coming weeks.
The report also highlighted that a key driver of the recent stock rally has been market bets on a sustained ceasefire and a subsequent retreat in oil prices easing inflation pressures. This, however, means equities are highly sensitive to any re-escalation of geopolitical tensions and a rebound in energy prices. A worsening conflict that drives oil prices higher could deliver a significant negative shock to markets. Citing options market pricing, Goldman noted traders currently assign a higher probability to a 10% drop in oil prices over the next month than to a 10% rise, implying that any unexpected sharp increase in oil prices could have a more pronounced negative impact.
Veteran Wall Street strategist Ed Yardeni, who has accurately predicted market moves on multiple occasions, recently noted that with conflicting signals and peace negotiations revolving around control of the critical Strait of Hormuz, the conflict is likely to cap stock market gains until resolved. He stated, "It's hard to imagine things truly concluding in the next few days or even weeks. The situation could remain quite messy." He added, "I think the market could experience a period of choppy trading—a consolidation pattern, perhaps lasting through the summer."
However, despite near-term caution due to the uncertain conflict outlook, Yardeni maintains his year-end target of 7700 for the S&P 500. Significant capital remains on the sidelines waiting to enter the market, and corporate earnings continue to show strength. Yardeni suggested that analysts' optimistic profit forecasts were one reason U.S. stocks did not decline more sharply after the conflict began. "Even during the sell-off, earnings estimates were rising—it was almost as if analysts didn't get the memo that a war had started," he said. He concluded, "I don't think the market will retest the March 30 lows. There is too much money on the sidelines ready to buy any dip."
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