The markets continue to soar despite the Iran war and a host of other worries, but the smart money has quietly settled on a gauge for figuring when things could go south – and all eyes are on the price of oil, On The Money has learned.
Specifically, the warning level I’m hearing from CEOs, hedge fund types and high net-worth brokers is close to $120 a barrel. If you believe the sentiment, that’s pretty good news given that even with the conflict in the Persian Gulf heating up, oil is still hovering around $80 a barrel.
Does that mean you should start buying stocks? Well, a few words of caution. First, oil prices can change quickly, and the Iran situation is volatile. There’s also a minority view, I have discovered, that holds any conflict disrupting the supply of oil – even if it’s the Iranian stuff mostly bought by the Chinese, is bad for the global economy.
To be sure, the people I speak to are pretty sanguine that the worst-case-scenario isn’t in the cards. Here’s that calculus from one financial services CEO: Corporate earnings, and particularly those in the financial sector (which happens to be the plumbing of the economy and markets) are doing great. See the latest earnings of JPM, Goldman Sachs and the rest.
AI spending is still plentiful and producing productivity gains. That’s a “great background for strong long-term markets,” my CEO source says. His caveat is that higher oil prices can “can moderate financial performance” by increasing inflation and squeezing profit margins. But that, he adds, is only if oil stays above $120 for months, and even then it will only have a “short-term impact on the markets.”
Why not long term? Well, corporate America is pretty good at improvising and we produce a lot of oil here, so this can’t turn out to be another 1970s shortage situation.
And what makes $120 a barrel such a magical number? You will recall that when the Iran bombing began in March, oil prices went there and the markets cratered significantly. The reason has to do with risk parameters of traders and how oil at that price filters through the economy through inflation, squeezing consumer spending and corporate earnings.
But markets have been on a roll since. While the on-again, off-again war with Iran has kept oil prices jumpy, investors are now more worried about the continued benefits of AI spending and productivity gains.
So then the question becomes will we hit that magical $120 if the fighting gets real hot? Yes, but again, the Wall Street smart money believes to disrupt the market, it needs to last a while since the economy on its own is doing pretty well, as is the mother’s milk of stock prices, corporate earnings.
Note that there’s also a significant minority view – also held by some smart people inside the White House – that a renewed conflict is a dangerous game. These are people like Vice President JD Vance who have never been crazy about a prolonged conflict – not just because it increases the odds for boots on the ground and significant American casualties – but because of the economic ramifications.
Oil above $120 a barrel even for a few months will stoke inflation and interest rates, making it harder to finance the growing US deficit that armed conflicts add to. Higher rates will also crush stocks and dampen consumer spending, sparking stagflation.
That argument won the day inside the White House with President Trump and it’s why he tried to negotiate a deal, I am told, until Iran kept reneging on various promises regarding nuclear arms and the Strait of Hormuz.
But again, the Wall Street smarties I speak to give that doomsday scenario low odds. They feel any conflict won’t last for months and the US is now energy independent. Plus, oil-rich nations (think the Saudis) have been looking for a workaround from the Strait of Hormuz, since the Islamic Republic, while on its last legs, still has ample supply of drones.
In other words, keep an eye on oil, but keep a cool head, too – and beware the doomsayers.
