It's The Duration, Stupid: The Impact Of Oil On S&P 500 Earnings

The market reaction to the Middle East headlines so far has been fairly consistent with how equities historically trade around geopolitical shocks.

Since 1950, during seven major spikes in the Geopolitical Risk Index, the S&P 500 has fallen roughly 4% on average in the first week, but has typically recovered back to pre-shock levels within the following month...

The distribution of outcomes is wide, but the key point is that markets typically price the uncertainty quickly before refocusing on growth and earnings.

So, with that in mind, Goldman Sachs points out that the direct impact of modestly higher oil prices on S&P 500 earnings should be relatively muted, but a prolonged period of severe disruption or uncertainty would pose a more meaningful downside risk to their forecasts.

Goldman's baseline forecast is for S&P 500 EPS growth of 12% in 2026 and 10% in 2027.

Goldman's economists' rule of thumb is that a sustained $10/barrel increase in oil would reduce 2026 GDP growth by about 10 bp and boost core CPI by less than 5 bp.

Likewise, the net effect of higher oil prices on S&P 500 EPS should be roughly neutral, but with variation across industries. Higher oil prices directly benefit the earnings of Energy firms, but are a headwind for industries that rely on oil as an input, such as airlines, and industries exposed to consumer spending. These fundamental relationships are consistent with industry rotations during historical oil price spikes.

For US equities, the bigger risk is a sustained period of severe oil disruption that weighs on economic growth.

Every 1 pp change in real US GDP growth corresponds to a 3-4% change in S&P 500 EPS in our top-down model.

In addition to the potential drag on economic and earnings growth from higher oil prices, a sustained major increase in uncertainty could also undermine corporate confidence and the nascent rebound in industrial activity that has contributed to recent rallies in many “old economy” cyclicals.

Finally, as Rich Privorotsky noted earlier, the big picture is that with more duration we want to stay constructive around these levels... but with our trading hats on, the focus has to remain risk management (think $150+ oil has to be in distribution).