The recent sell-off in the S&P 500 could potentially worsen unless oil prices start to decline, according to research from JPMorgan Private Bank. In a client note released on Friday, bank analysts highlighted the possibility that persistently high oil prices could trigger a cascading effect in the equities market. This scenario could lead to intensified selling pressure on stocks, spreading losses from the U.S. market to global equities and ultimately influencing economic growth.
Brent crude, which serves as the international benchmark for oil prices, has been fluctuating around the $100 per barrel mark, largely due to ongoing supply disruptions in the Middle East. The analysts warned that if oil prices remain above $90 per barrel for an extended duration, it could prompt a significant correction of 10%-15% in the S&P 500. They indicated that this decline could spill over into international and emerging markets as well. As oil prices escalate—particularly if they reach or exceed $120 per barrel—the selling in the S&P 500 may become more pronounced, according to Kriti Gupta, JPMorgan’s executive director, and Joe Seydl, a senior markets economist.
Moreover, the potential impact of rising oil prices goes beyond the equities market and could have serious repercussions on the U.S. economy. The bank identifies two main ways in which higher oil costs could impede economic growth. First, the prices at the pump have already surged, with the national average for a gallon of gasoline hitting $3.63—up 21% since the start of the current U.S.-Iran conflict. Second, the so-called wealth effect could come into play; as Americans observe declines in their stock investments, they may curb their spending habits. Recent data from the Federal Reserve shows that U.S. households held $56.4 trillion in stocks and mutual fund shares by the third quarter.
JPMorgan estimates that a 10% drop in the S&P 500 could result in a 1% reduction in consumer spending across the United States. The analysts emphasized that the compounded impact of consistently high oil prices combined with a bear market in the S&P 500 could create a damaging demand effect, significantly impairing economic growth.
Market participants have become increasingly anxious about the broader ramifications of soaring oil prices, especially in light of recent geopolitical tensions following the onset of the Iran war. The main concern is that elevated crude prices could exacerbate inflation while simultaneously stunting economic growth, a troubling combination given preliminary indications that the U.S. economy is already exhibiting signs of slowing down. This evolving landscape has led some economists to raise the likelihood of a recession in light of mounting pressures from escalating oil prices and other contributing factors.
