Stock market, economy sectors to watch

The escalation of clashes between the United States and Iran over the weekend caused Wall Street to reconsider its expectations about the economic impact of the war.

The United States completed its 10th consecutive nighttime attack on Iran on Monday after Yemen’s Houthis declared a naval embargo on Saudi Arabia. This follows the death of a third soldier during the latest clashes, which could mean the war has entered a longer-term and deadlier phase. President Donald Trump promised the United States would retaliate, saying in a post on Truth Social that they “will pay.”

Investors appear to continue to ignore the latest flare-up in tensions. S&P 500 It fell marginally in Monday’s session after a losing week. It was also just 2% below its all-time high set in June. Still, economists worry that another rise in energy prices could put pressure on consumers and the broader economy.

‘All about duration’

In terms of the stock market, the war in the Middle East had little impact. The S&P 500 index has jumped to all-time highs since its closing low of 6,343.72 in late March. This is largely due to the assumption that neither the United States nor Iran will want to return to direct war; This is an undesirable outcome as both would lose if the global economy went into recession.

Given that the strength of corporate earnings has been accelerating since the start of the second-quarter reporting season, investors have instead shifted their focus to fundamental data. Last week’s weaker-than-expected inflation data also increased investors’ optimism.

But investors can’t ignore the recent rise in oil prices and rising bond yields for long. Brent Crude oil briefly rose above $90 a barrel on Monday and hovered just below that level on Tuesday. US 10 year Treasury The yield traded above 4.6% on Monday; This is an important level followed by traders. It remained near this level on Tuesday.

If crude oil and the 10-year Treasury yield continue to rise or stay higher for longer than investors hope, Wall Street may have to start pricing in changes in inflation expectations and monetary policy that will ultimately hit a company’s bottom line.

“It’s about duration,” said Art Hogan, chief market strategist at B. Riley Wealth. “If we get above $85 or $90 towards the end of the year, I think this year’s earnings estimates will have to be lowered.”

In a worst-case scenario, the S&P 500 could fall into a correction, Hogan said. But he also noted that the broader index will be supported in part by technology, its largest sector that has been relatively insulated from higher energy prices. According to S&P Global, technology has a 38% weight in the S&P 500, while energy has only a 3% share.

Finance and healthcare are two other sectors that could continue to benefit from sustained headwinds regardless of higher oil prices. The energy sector and logistics companies that are dependent on fuel will likely be the biggest laggards. ryanairFor example, it said on Monday that its weak first-quarter profit was due to delayed bookings due to the Middle East crisis.

The region will be carefully monitored for any tensions that would deter passage through the Strait of Hormuz.

Marko Papic, macro and geopolitical strategist at BCA Research, said he is monitoring whether conservatives in Iran will gain more power or whether the United States will increase the number of troops it sends to the Middle East.

But others remain confident in the market and expect the geopolitical outlook to improve only in the second half of the year. JPMorgan’s Mislav Matejka said he is sticking to the strategy he has implemented since the second half of March; In this strategy, he uses escalating conflicts to continue to increase declines.

“We continue to believe investors should use declines driven by geopolitical headlines to provide greater visibility,” Matejka wrote earlier this month. “We believe the market is becoming increasingly adept at temporarily pricing geopolitical risk.”

‘It’s all negative’

Economists are worried about what a potential rebound in fuel prices as a result of the increase in fighting will mean for U.S. consumers and the businesses that serve them.

“There’s nothing but negatives here for the U.S. and global economies,” said Mark Zandi, chief economist at Moody’s Analytics. “Obviously a lot depends on exactly how this all plays out and what that means for oil and other commodity prices. But it’s all negative.”

According to Zandi, the average American household has lost about $1,100 since the war; This figure includes rising energy costs and increased military spending. This has resulted in real disposable income coming in either negative or nearly flat on an annual basis in recent months; This is often seen during recessions, Zandi said.

Zandi said that with the increase in energy prices, consumers are turning to savings to support their spending. But Zandi warned that this situation could not continue as rainy-day funds dwindle: According to the Bureau of Economic Analysis, the personal savings rate stood at 3% in May, down nearly 2 percentage points from the previous year.

Gasoline prices rose to $4 per gallon on Monday for the first time in more than a month. According to AAA.

Economists expect the renewed rise in oil prices to put upward pressure on the consumer price index. May’s 12-month CPI reading reached a three-year high before retreating last month as energy costs fell.

But “core” CPI readings, which exclude volatile food and energy prices, may not move higher at the same time, eliminating the need for the Federal Reserve to raise interest rates. Fed funds futures are pricing in a greater than 83% chance that the central bank will keep interest rates steady at its meeting next week, according to CME. FedWatch tool.

“We’re going to get higher inflation readings because of gas prices,” said Luke Tilley, chief economist at M&T Bank and Wilmington Trust. But “the key for the Fed, as they all say out loud, is: Will it be reflected in core inflation?”

Consumer Edge analyst Michael Gunther said companies with value-oriented or driving-addicted consumer bases could see their customers become more selective if oil prices remain high. This can negatively impact businesses such as: Dollar General with Tractor Supply with Texas RoadhouseHe found his company.

Gunther, on the other hand, thinks that warehouse clubs costco And Sam’s Club Drivers can gain market share as they pursue value. Costco reported “record-breaking volumes” for gas at the end of its third fiscal quarter as the war caused pump prices to rise.

“Consumers are paying attention,” Gunther said. “And they are changing their habits of managing their wallets.”

Retail sales showed that consumers continued to spend in the face of war-related cost shocks. But Gunther said there are unique spikes, such as event tickets and World Cup gambling.

Consumers also felt stuffed as the war broke out due to massive tax returns under President Donald Trump’s “big, beautiful bill,” according to Heather Long, chief economist at Navy Federal Credit Union. But Long said they likely won’t experience similar headwinds if they face rising energy prices in the back half of the year.

“The cushion is deflating,” Long said. “No other obvious air pump coming.”