Oil Prices Surge: A Looming Threat to U.S. Equities?

Goldman Sachs warns that prolonged high oil prices may significantly impact U.S. equities, potentially reducing S&P 500 earnings by up to 4% for each percentage point drop in economic growth. Despite the historically brief impact of geopolitical shocks, emerging factors such as AI investments play a critical role in future earnings.

Goldman Sachs has flagged a prolonged period of elevated oil prices as a major threat to U.S. equities this year. The firm notes that a one percentage point decrease in U.S. economic growth could cut S&P 500 earnings by up to 4%, as oil prices climbed above $119 a barrel amid geopolitical tensions.

While Goldman acknowledges that modestly higher oil prices may have muted direct effects on S&P 500 earnings, they caution against the broader uncertainties it poses, including a potential hit to equity valuations and industrial activity. Historically, such price shocks briefly impact equities, with geopolitical risk indices seeing S&P 500 declines averaging 4% in past events.

AI investments could be a buffer, with anticipated contributions of up to 40% of EPS growth by 2026. However, if oil prices spark inflation worries, the Fed might delay rate cuts, suggests Barclays. As uncertainty looms, equity markets and investors brace for potential broader economic impacts.

(With inputs from agencies.)