Skip to main content

Investors are worrying that rising energy costs stemming from an escalating conflict between the United States and Iran that has caused a spike in oil prices will hurt U.S. corporate earnings.

Oil prices briefly jumped to four-month highs overnight after Iran launched missiles at U.S.-led forces in Iraq, but retreated after signs that further military action may been limited. Despite that pullback, oil prices remain nearly 25-per-cent higher over the past 12 months, due in part to rising tensions in the Middle East.

While the energy sector would benefit from higher oil prices, profit margins in other sectors ranging from shipping to manufacturing to restaurants would narrow as gasoline prices rise. Some investors said they were acting more defensively against this backdrop.

Story continues below advertisement

“Oil is still not prohibitively expensive, but it’s significantly more expensive than it was when companies were making their budgets a year ago,” said John LaForge, head of real asset strategy for Wells Fargo Investment Institute. “They might have the ability to pass it on or they might not, but overall there is going to be a hit to margins.”

At US$67 a barrel, the price of oil remains far below the level that would send the United States into an immediate recession. Yet higher energy costs at a time of heightened geopolitical risks are likely to leave investors and companies skittish, fund managers and analysts said.

The conflict between the United States and Iran escalated early on Wednesday with a retaliatory Iranian missile attack on U.S.-led forces in Iraq for the U.S. killing of an Iranian general days earlier

Yet oil futures fell after tweets by U.S. President Donald Trump and Iran’s Foreign Minister seemed to signal that further military action was not forthcoming. Mr. Trump had ordered a drone strike on Friday that killed Iranian General Qassem Soleimani.

The benchmark S&P 500 index posted modest gains in midday trading on Wednesday.

First-quarter earnings of companies in the S&P 500 are expected to rise 6.2 per cent from a year earlier, according to estimates from Refinitiv made before the recent jump in oil prices. Those estimates were largely based on assumptions that economic growth will rebound in 2020, though corporate earnings are expected to have fallen by 0.6 per cent in the fourth quarter of 2019. Companies will begin reporting results next week.

WAKE-UP CALL

The likelihood that oil stays near current levels or moves higher will push more investors into a defensive crouch until it becomes clearer how companies are responding, said Barry James, a portfolio manager at James Investment Research.

Story continues below advertisement

“Stocks are not cheap and we’ve had this huge run-up and sentiment had gotten dangerously bullish,” he said. “I would want to have at least a moderate position in energy if I didn’t have any and some gold in my portfolio.”

The attacks should serve as a wake-up call to investors who piled into stocks during the S&P 500’s months-long rally, said Christopher Stanton, chief investment officer at San Diego-based Sunrise Capital LLC.

“We’ve had three months of asymmetric upward moves in the equity markets,” he said. “Things have become increasingly overbought. If you’re an investor, don’t you want to take it easy here and back off a bit?”

Still, oversupply in the global oil market and the emergence of the United States as the world’s top oil producer will likely keep oil below US$75 a barrel. That is, as long as the conflict between the United States and Iran does not escalate to the point where Iran attempts to close the Strait of Hormuz, a chokepoint through which about a fifth of the world’s oil supply flows, Mr. LaForge said, as he put the price of oil in perspective.

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies