Morgan Stanley's Mike Wilson, chief US equity strategist and CIO, has identified higher oil prices as a crucial risk for equities, despite previously forecasting a 20% rise in S&P 500 earnings over the next 12 months. This shift in concern stems from the potential for sustained high energy costs to erode consumer spending, a sentiment echoed by Morgan Stanley's Global Chief Economist Seth Carpenter, who believes higher gas prices will negate any boost from increased tax refunds. The firm has already revised its US economic growth forecast down by approximately 0.3 to 0.4 percentage points due to these elevated energy costs, underscoring the severity of the threat.
The impact of high energy prices extends beyond immediate consumer spending, potentially influencing the Federal Reserve's monetary policy and the outcome of the 2026 midterm elections. Inflation, with the July CPI at 3.5% year-on-year, remains a key concern for households, and highly visible costs like gasoline and electricity directly shape voter perception of economic well-being. Historically, rising gas prices in the period leading up to midterm elections have been associated with an average loss of 32 House seats for the incumbent party, compared to a six-seat loss when prices fell, making energy costs a salient political issue.
While the first quarter of 2026 saw a positive start for global equities, sentiment reversed following US and Israeli strikes on Iran at the end of February, leading to a 6.4% fall in the MSCI World Index for March. Brent crude surged an unprecedented 63% in March due to disruptions in the Strait of Hormuz, marking what is considered the largest supply shock since the 1970s. Despite some market recovery by April due to a ceasefire, the outlook remains uncertain, with energy being the only sector to deliver positive returns (+12%) in March, while defensive sectors underperformed.
Wilson's earlier optimism for S&P profit growth was based on strong corporate performance. However, the current geopolitical tensions and their effect on oil prices introduce significant inflationary pressures, potentially leading to stagflation and reducing the likelihood of near-term interest rate cuts. This environment has also affected gold, which, despite a 25-year bull market, has struggled as a safe haven due to its sensitivity to monetary policy and the Fed's hawkish stance driven by high oil prices.
