Just when it looked like inflation was abating, with nationwide retail gasoline prices falling from an average of $3.20 to $2.73 a gallon between August and January, the specter of rising prices has appeared once again in the wake of the latest Middle East conflict.
As of this writing, the national gas price average is $3.99 a gallon (the chart below is updated weekly and current as of March 23) and rising almost daily, which is 46% higher from the January low. Surging crude oil prices, the result of shipping disruptions through the Strait of Hormuz, are the culprit, as is the ongoing U.S./Israel-Iran war, which is expected to keep energy prices elevated heading into spring.
U.S. Energy Information Administration, US Regular Conventional Gas Price [GASREGCOVW], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GASREGCOVW, March 27, 2026.
It stands to reason that elevated fuel prices will eventually result in a higher cost of goods across any number of product categories that need to be shipped. Without further explication, this means inflation will almost certainly continue to plague the economy going forward, which begs the question: How much of an impact will it have on the equity market?
In the overall inflationary environment that has persisted over the last few years, Wall Street’s focus has been on corporate profit margins, which reveal to what extent companies have been able to maintain profitability in the face of rising input costs. For the most part, companies operating across the 11 S&P sectors have been able to maintain profit margins at reasonable levels up until now (although some industries have recently begun experiencing margin pressure).
A big part of that paradigm was corporate America’s ability to pass on higher costs of doing business to its customers, underscoring the degree to which companies have enjoyed pricing power in the face of inflationary pressures. Supply chain normalization in the wake of the Covid years has also helped.
But an argument can be made that a key reason why those profit margins have been largely sustainable is because of the sub-$80 per barrel crude oil prices that have prevailed over the last couple of years. What happens, then, if the new oil price average is suddenly around $100 per barrel or even higher? If some of Wall Street’s most notable analysts are right, we may soon find out.
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Indeed, the lower oil prices that have largely been seen in recent years have enabled lower petrochemical and manufacturing input costs for producers, lower transportation and logistics costs for shippers and lower energy costs for industries across the spectrum. When fuel costs start to increase, the margin pressure that certain industries have begun to feel is likely to become far more widespread, in turn impacting equity prices.
Goldman Sachs has raised its 2026 oil price forecast in the wake of the latest Middle East conflict, predicting the Brent crude price will average $98 per barrel in March-April and possibly persisting until at least this year’s fourth quarter.
Meanwhile, economist Ed Yardeni has warned that crude prices could remain above $100 a barrel on a sustained basis over a “prolonged period” due to the shipping threat in the Strait of Hormuz. He further warned that the oil shock could lead to “1970s-style stagflation,” where high energy prices cause high inflation while economic growth slows.
Yardeni further raised the probability of a U.S. stock market “meltdown” this year to 35%, which is up from his previous estimate of 20%. Nevertheless, he maintains that his famous “Roaring 2020s” scenario for productivity-led economic growth and strong stock prices remains his baseline despite the heightened geopolitical risks.
While I tend to concur with Yarden’s long-term bullish scenario, it can’t be denied that short-term market risks remain elevated. A quick overview of past oil price spikes reveals the startling revelation that in almost every case, when crude oil prices quickly surged in the wake of a major geopolitical event, stock prices fell sharply on at least a near-term basis. Examples include the 1973-74 oil crisis (S&P down 48%), the 1990 Gulf War (S&P down 20%), the 2007-08 credit crisis (S&P down 57%) and the 2011 oil surge to above $120 per barrel (S&P down 20%).
To provide some further insight into what we might expect as investors from another wave of inflation, I examined the historical tendency of each of the S&P’s 11 sectors in the face of inflation to see how each one has typically reacted to margin pressures.
How the S&P 500 Sectors Perform During Rising Inflation
Here’s what I found:
1. Transportation is extremely sensitive to inflation, with fuel representing 20% to 40% of operating costs (including for airlines and trucking firms). Spiking oil prices can quickly shrink margins unless operators impose fuel surcharges.
2. Consumer discretionary firms have a high sensitivity to higher fuel prices, with retailers, restaurants and travel companies often experiencing revenue and margin pressures.
3. Manufacturing-heavy industrial companies have a moderately high sensitivity to inflation since they tend to be energy-intensive.
4. Materials companies—including chemicals, plastics, fertilizers and packaging—have only a moderate sensitivity to higher energy costs. Chemical firms in particular could see some margin pressures due to higher feedstock costs from oil, although companies that rely more on natural gas (NG) should feel less pressure since NG prices are considerably lower than oil prices right now.
5. Agriculture and food production firms (which broadly entail the consumer staples category) have a moderate sensitivity to higher oil prices. However, food production companies tend to be able to pass on higher costs to consumers (particularly non-discretionary, staple-type foods).
6. Precious metal miners often benefit from rising oil prices, in spite of higher production costs, since metal prices tend to rise in tandem with oil (particularly if the oil spike is due to geopolitical turmoil). This often translates to higher profit margins for gold and silver producers. However, for producers of base metals like copper, zinc, etc., the outlook is more nuanced, with industrial demand determining the profit margins.
7. Energy companies have the lowest sensitivity to higher oil prices since, obviously, they directly benefit. Among all major sectors, energy producers are the ones most likely to see increased profit margins in an inflationary environment.
With the above observations in mind, investors might consider reviewing their portfolios to see how they can optimize them in the face of what is likely to be another wave of inflation coming our way. Here at the Cabot Turnaround Letter, we can help you do that.
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