Market Sense
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While strains from the conflict in Iran are already apparent in economists’ GDP forecasts, S&P 500 earnings estimates have hardly budged. The rub: GDP is heavily tilted towards consumption, increasingly at risk thanks to elevated oil prices, while earnings instead follow business investment. Thus, bottom-lines are likely to be revised lower but may not match the drop in GDP anytime soon.
Economic Forecasts Hit by War, Earnings Holding Up
Economists are forecasting 2.3% real GDP growth in 2026, a modest acceleration from 2.1% last year, but have started slashing expectations for growth in 2Q and 3Q this year. The Bloomberg consensus of economists dropped their 2Q forecast to 1.8% from 2.2% just a month ago and nudged their 3Q forecast down to 1.9% from 2.0%. Meanwhile, analysts’ S&P 500 earnings forecasts rose. Over the last month, analyst expectations for 2Q and 3Q earnings growth rose to 19.3% and 16.5% from 15.9% and 13.6%, respectively.
Several things may explain the large divergence between economic growth and earnings forecasts. For a start, GDP is not particularly indicative of earnings trends. Even on a nominal basis, GDP growth is a highly imperfect indicator of profits. In fact, a single variable OLS regression suggests that only roughly 26% of movements in rolling year-over-year (YoY) trailing earnings growth are explained by YoY changes in nominal GDP. Our macro model uses other factors more indicative of earnings growth for this reason and has a more robust R-squared of 0.62. (see 4/8 note for our latest update on the model).
Consumer Drives the Economy but Tech Drives Earnings
Importantly, while earnings are largely driven by technology, the economy is driven by consumption. Higher for longer oil prices are already starting to impact the consumer outlook, eroding the boost from tax refunds this year – and this is likely weighing on the economic outlook more than the market outlook. So far, tax refunds are up 11% versus the same period a year ago, about $350 per filing, with about half of expected returns now filed. The IRS has paid out just over $200 billion so far this year. U.S. households will likely need to allocate some of that refund to covering higher energy costs. In 2025, households spent approximately $700 billion on energy in aggregate, when oil prices averaged ~$65/barrel (WTI). If oil averages 50% more this year, households’ energy bill will rise to closer to $770 billion, all else held equal, eliminating about 20% of the tax refund.
The bigger impact of high oil prices on stocks may come from the effect of elevated commodity costs on business investment trends. While consumption is still the bulkier category, at roughly 2/3rds of GDP, it grew just 2.6% in 2025, its slowest pace in the post-pandemic recovery, and is expected to rise only 2.1% in 2026. Business investment is meanwhile expected to grow at a faster pace of 2.7%, supported by the combination of equipment, software, and infrastructure investment, up 11% last year and is likely to grow faster in 2026 as topline growth for AI-related segments accelerates. This investment is the bigger driver of profits in the S&P 500. About 40% of index EPS this year is expected to be generated by the tech and communications sectors, and another 11% may come from industrials and materials. Consumer sectors together, including mega-caps Amazon and Tesla, are meanwhile expected to be just 12% of index earnings.
Non-Domestic Exposure and Energy Sector Also Play a Role
The S&P 500 is also more globally oriented than the U.S. economy. While just 10% of U.S. economic growth comes from exports, about 30% of S&P 500 sales come from outside of the United States, furthering the divide between economic measures of output and earnings trends on the index. Likewise, over 40% of S&P 500 cost of goods sold (COGS) are sourced from overseas which could cause the economy and earnings to decouple further, especially should the war in Iran resume. That conflict had already driven Brent crude to trade nearly $17 per barrel above West Texas Intermediate (WTI) prices before normalizing ahead of rumored ceasefire talks – making non-domestic inputs even costlier. In contrast, imports of goods and services were 13.8% of US GDP in 2025 based on data from the Federal Reserve.
Finally, very large swings in the profitability of energy companies can also have outsized impacts on the earnings stream during periods of oil and gas price surges. Even though energy is a very small share of the market (about 5%), energy sector earnings swings are so violent that they can mask trend shifts in other sectors. After three straight years of declining profits, analysts forecast energy companies may record 25% EPS growth this year on account of the price recovery, a 35-percentage point swing from a 10% drop in EPS in 2025.
Conclusion
GDP is a highly imperfect signal for profits, as it is heavily skewed to consumption and more domestically oriented than the largest companies in the United States. Thus, while it looks increasingly likely that S&P 500 earnings will decelerate on account of higher energy prices in the short term, it is highly unlikely that profits will match the pace of broader economic conditions. Though the direction of change will be somewhat consistent, we can expect large divergences between U.S. GDP and S&P 500 earnings growth to remain.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Ceasefire in the Middle East is undoubtedly encouraging news, and if it leads to peace and stability in commodity prices and a stable reopening of the Strait of Hormuz, it could also help support the fundamental case for equities. However, even if peace is achieved in short order, earnings forecasts appear too high. Downward adjustments to expectations have likely just begun. History suggests elevated oil prices have a lagged impact on fundamental conditions, and as long as oil prices remain somewhat elevated, downward revisions may remain a drag on the resumed bull trend in stocks.
Historical Experience Suggests Earnings Impact Likely
Oil prices have dropped from extremes on news of ceasefire but are still about 50% above where they started the year. Unless oil prices ease back to pre-war levels soon, consensus forecasts for near-term earnings growth are likely to adjust lower, and this may effectively operate as a drag on any renewed bull trend
Disrupted supply in the Middle East risks extending the oil shock. Thanks to the conflict in Iran, global oil production has already slipped by ~8 million barrels per day (8% of total global supply), the worst production shock on record. In the worst of the 1990 Gulf War crisis, supply dropped 4.3 million barrels (6.5% of supply). In the 1973 oil embargo, 7% of supply was disrupted. The path to supply recovery could extend through the quarter, and has the potential to be quite disruptive to the S&P 500 earnings stream.
Oil shocks that last at least a quarter are relatively rare – occasionally resulting in periods of stagflation and earnings decline, ala the 1973 embargo, the early 1980s double-dip that was partially sparked by disruptions from the 1979 Iranian Revolution, and 2022’s near-miss of recession. We find 10 instances of oil price spikes of 50% or more that lasted at least three months since 1985 – half of which were the result of a supply shock. In the twelve months following these spikes real GDP rose just 1.8% on average and S&P 500 earnings fell -0.5% on average. Notably, oil prices and earnings are positively correlated – earnings tend to go higher as oil prices rise and the earnings downside of the price shock does not typically emerge until the shock itself has peaked.
Analysts Forecasts Diverge from Macro Cues
Earnings risks from the commodity supply shock are not yet embedded in consensus expectations and are likely to emerge in the coming quarter. Analysts are forecasting 17% earnings growth for the S&P 500 in 2026, and 16.2% growth excluding the Mag-7. While part of this is due to an expected turnaround for the energy sector, from -10% last year to more than 25% growth this year, ex-energy earnings are also expected to rise 16.6% this year. Over the next twelve months, analysts are still anticipating greater than 20% growth.
These forecasts for strong earnings growth contrast with current macroeconomic trends, which currently imply growth of closer to 8%. Our macro-based model for earnings growth relies on the indicators that have historically offered predictive value for corporate earnings – investment, employment, changes in short-term rates and commodity prices. In any scenario we design, analyst estimates are too high. Current economic consensus around these indicators, which presumes a near term reprieve for commodity price pressures, suggests 8.5% EPS growth over the next twelve months versus the analyst consensus for 20.1%.
Even a quick resolution to the conflict (a bullish scenario) is likely to deliver just 11.2% bottom-line growth if the Fed keeps rates steady as commodity prices slowly normalize and the economy accelerates. If instead a scenario akin to the five historical supply-driven oil price spikes we analyzed emerges – one where new orders falls 5.8%, 2-year treasury yields slip by 18 bps, employment holds firm and commodities return to their post-pandemic high – earnings could rise merely 3.5%.
Analysts have started to mark down estimates, but not materially so, compared to past earnings seasons. Index level revision momentum dropped last week for the first time since December, as downward revisions in consumer and industrials segments of the index finally started to overwhelm the whole. In fact, since the start of the war, consensus has started to trim discretionary, industrials and staples 1Q-2Q26 EPS forecasts. Likewise, while chemicals and metals & mining are buoying materials sector estimates, analysts have taken an axe to construction materials and containers & packaging forecasts. Consumer-related sectors, especially discretionary, non-defense industrials and swaths of materials earnings likely remain most at risk of negative revisions should oil prices remain higher for longer.
Helping to offset those sectoral strains, the S&P 500’s concentration in tech and tech-like sectors may be a blessing in disguise, for it weakens linkages to typical measures of economic activity and blunts the worst of any oil-driven degradation of the overall earnings stream.
Market technicals have improved materially with ceasefire in the Middle East, reducing the likelihood of a bear trend emerging for stocks. However, an uncertain path to durable peace and a long runway for rebuilding supply may keep commodity prices elevated and supply chains strained. Our macro-based model points to a lighter earnings recovery than consensus anticipates even if peace emerges in short order, with greater downside if oil prices remain high. Oil price shocks have consistently led to slowdown in earnings growth historically, contrary to analyst expectations for very robust earnings growth this year. Consumer, non-defense industrial stocks and swaths of materials may remain most at risk, while tech and tech-adjacent equities could offer portfolio ballast as forecast adjustments to the oil price shock emerge.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
U.S. equity market valuations are starting to reflect inevitable inflation and growth risks of war in the Middle East, and while this may be enough to catalyze opportunistic dip-buying on a selective basis, optimistic analyst sentiment may continue to impede the formation of a more durable advance. Contrary to the view that strong growth forecasts are reason for cheer, history shows that analyst sentiment after peaks in stocks requires a contrarian take. Thus, downward estimate revision from the analyst community may be a final shoe that needs to drop for stocks to make a sustainable low.
Normalized Multiples Are Approaching Former Lows
Valuations are imperfect timing mechanisms, but on a normalized basis are now close to the level that marked the low for stocks last year. On a blended forward 36-month basis, S&P 500 multiples are now approaching 15X earnings. Lows in 2022 and 2023 occurred closer to 14X, and the low in 2025 occurred at 14.7X. It is likely that fundamental damage from the closing of the Strait of Hormuz and destruction of mining facilities throughout the middle east is going to be more significant than the shock from tariff policy, but the 15x level may nonetheless spark some near term dip buying, as the correction has gone a long way toward removing excesses that emerged in equity markets by late 2025.
Analyst Forecast Still Needs to Drop
Though markets have started to price an earnings disruption, analyst forward earnings forecasts have not started to capitulate to the inevitable economic damage of war, and that may also be necessary before stocks can find a low. Analyst estimates have been going higher throughout the downdraft in stocks this year. This is not unusual, nor should it provide solace with respect to the outlook. Instead, interpretation of this analyst estimate “resilience” should be contrarian. Analysts are often slower than markets. In fact, analyst estimates moved higher at the start of selloffs in 2018, 2022 and 2025 as well. The only recent major correction when analysts did not lag the market materially was in 2020, when economic shutdown made it clear that earnings were not going to continue to rise.
In recent history, analyst capitulation to downdrafts in the market has offered a pretty good indication of lows forming in stocks. In 2022, analyst forward 12-month EPS forecasts touched a high in June 2022 and fell 1.7% before the market made its low 16 weeks later. Even in the relatively swift correction of 2025 that lacked an accompanying earnings downdraft, analyst negative estimate revisions were a precondition for a low in stocks. On average, analyst forecasts peaked over 42 days after stocks peaked in the 2018, 2020, 2022 and 2025 corrections. The forecast peak on average was a touch closer to the low than the high in stocks as the average was just 39 days before stocks bottomed. Analyst estimates also tend to fall for quite some time after market lows have been reached. On average, estimates hit lows 49 days after markets hit bottom.
As we mentioned in our March 17th note, “The Inflation Clock is Ticking on Earnings”, analyst expectations for ex-energy profits are likely to be particularly telling this cycle. Much like in 2022, energy sector estimates are likely to move higher to reflect the improvement in base commodity prices, distorting index headline earnings. But profits damage from extreme moves in commodity prices is inescapable, and ex-energy earnings forecasts will need to adjust lower to reflect a more troubled outlook for both revenues and margins among non-energy companies in the index. Analyst acceptance of this fact has historically been a precondition for a low forming in the broader equity markets, and is likely to be necessary this time as well.
Even if the recent spike in commodity costs proves fleeting, a secular reality of higher average inflation with large spikes may be setting in, and this may be tricky for stocks to shrug off, particularly at current valuation levels. The bond market’s implied inflation expectations for the next year have surged beyond 5%, the highest level since 2022, and forecasts for longer term inflation are on the rise as well. If the bond market proves correct, U.S. stocks may face valuation pressure in the short run – S&P 500 P/E is still over 23X but averaged less than 13X in past periods when inflation was over 5%.
Inflation Expectations Resetting Across Time Horizons
Bond markets have rapidly repriced near-term expectations for U.S. inflation in response to surging commodity prices. The implied 1-year breakeven inflation rate is now above 5% for the first time since 2022. Back then, the implied inflation rate broke above 6% at its peak and held north of 4% for over 14 weeks. So far this time, the 1-year inflation expectation has been above 4% for just 3 weeks.
The jump in near term inflation has also pushed forecasts for 2 and 5-year breakevens higher, though both longer-term tenors remain more contained than they were in 2022. The 2-year inflation outlook is now 3.3%, and the 5-year outlook is 2.6%, according to the bond market. These rates have been rising since the end of 2025, but have jumped recently, also likely reflecting the near-term spike in commodity costs.
Valuations Do Not Fare Well with Inflation Over 3.5%
Elevated bond market-implied inflation expectations may present a problem for U.S. large cap equity valuations because the market is priced to expect very little inflation at this time. Currently the S&P 500 is trading over 23X times trailing earnings. On average historically, P/E managed to average a level over 20X only when inflation was below 3.5%. The S&P 500 P/E averaged closer to 17X when inflation was between 3.5-4%, and that average dropped to merely 12.8X when inflation accelerated past 5%, historically.
Inflation is so far predominantly a reflection of high commodity prices that may be resolved with a wind-down of war in the Middle East and opening of the Strait of Hormuz. Thus, the equity market may continue to dismiss the budding inflation problem as a temporary bond market overreaction. In 2022, inflation risks were also perceived to be transitory…until they weren’t…and then were again. This makes the bar even higher for markets to adjust expectations this time around.
To shift the market perspective on inflation, the long-term correlation between market valuations and inflation may need to signal a more permanent change. Since just after the financial crisis, the correlation between PE and CPI has been positive. Equity valuations and CPI have moved in tandem as nearly all of the increases in inflation were considered positive indications of rising demand. That has not always been the case. For most of market history before the financial crisis, CPI and PE were inversely correlated. A return to negative correlation between inflation and equity valuations will likely signal a more permanent shift in inflation sentiment has emerged.
Persistent inflation is perceived to be a phenomenon of the past in the U.S., and as a result the equity market is prone to believe inflation spikes are likely to be fleeting. Thus, the market may continue to shrug off this latest inflation spike as temporary in nature. However, it should not go without notice that inflation spikes have been more frequent and at higher levels this decade. We are currently experiencing the second spike in expectations in three years, a phenomenon last recorded more than 40 years ago. Meanwhile, consumer price inflation has been holding above 2% since the pandemic, something that hasn’t happened since the late 1980s. These signals send a warning shot to financial markets that may be ill-prepared for a different inflation regime. The more shocks accumulate, the less the equity market’s sanguine interpretation of inflation reflects reality. Amid rising inflation risks, equity valuations look increasingly out of bounds.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Stocks’ technicals continue to weaken, and for the first time in the post-Liberation Day bull market, U.S. large cap stocks are testing their 200-day moving average. In the words of Paul Tudor Jones, “Nothing good happens below the 200-day moving average.” While indeed, a close beneath this level increases the probability of more elevated volatility to come for stocks, it also suggests some of the froth in large cap equities may be finally starting to be removed. There is more room for derating to continue for stocks to reach levels consistent with what our model suggests is fair value.
The 200-day moving average has historically offered strong guidance with respect to the overall condition of the equity market. Drops below the moving average have historically triggered more volatile trading. Since 1990, the VIX averaged 16.9 when the market was above the moving average, but surged to average 27.2 when the index was below the moving average. Extreme returns, both positive and negative, cluster during the high volatility periods beneath the 200-day moving average, as economic uncertainty dominates market price action. Since 1990, 45 of the 50 largest daily gains and 48 of the 50 worst losses occurred when the S&P 500 was trading below its 200-day moving average.
While this history suggests we should prepare for more volatility if the equity market decisively breaks down beneath the key moving average, there is one “good” thing that also usually happens below the key level – buying opportunities emerge. As equity markets get more volatile, they also remove more froth, revealing discounts for the investor focused on the longer term.
In that vein, a dip below the 200-day moving average may be the first indicator that the market is finally starting to capitulate from an overly optimistic position. For an indication of full capitulation two things are likely to happen. First, volatility, represented by the VIX index, may need to spike to a level that indicates panic has set in. Historically, once the market drops below the 200-day moving average, the VIX index spikes to at least 30, and often over 40, to suggest a full panic has emerged in equities.
Second, valuations likely need to adjust to reflect much lower expectations. On average, stocks overcorrect multiples to account for risks. The average low in forward P/E after VIX hit 30 since 2007 was 15.3x and the average forward P/E after VIX hit 40 was 13.2x. At the very least, valuations may need to adjust to levels closer to fair value, as implied by our macro model. Valuations prior to the start of war were extremely high, at 21.3 times forward earnings, well north of the 19X our model suggests is justified by economic conditions. The decline in prices has already started to erode some of that premium, though with the market trading at around 20.2 times forward earnings now, there remains more room to the downside for valuations to reach our fair value estimate.
In sum, a market dip beneath the 200-day moving average suggests a higher probability that a period of more elevated volatility is likely emerging. It remains to be seen how long it will last once it sets in. Key indicators such as the VIX level and valuations can offer guidance as to when it may be approaching its final stages.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Producer prices rose at a faster than expected pace in February, continuing a streak of worrisome inflation signals for stocks. Core producer prices rose 3.9% over the last year, outpacing core consumer prices for the 5th consecutive month. Headline producer prices rose 3.4%, likewise outpacing overall consumer price growth by 100 bps.
The rise in pipeline inflation pressures is a challenge for stocks in two ways. First, it limits prospects for Fed ease, as the FOMC remains focused on maintaining an inflation target closer to 2%. Core producer prices hit a low in August last year and have been rising at 3% or faster since October 2025. While consumer price growth has been more contained, persistent gains in PPI hint at an element of inflation pressure in the pipeline that may keep the Fed on guard.
In the meantime, the difference between producer and consumer prices is an indicator of pricing power for US companies. S&P 500 margins tend to struggle in periods when producer prices are rising quickly, and faster than consumer prices. These inflation dynamics contrast with consensus views for margin expansion this year. As higher prices for food and energy emerge via the closure of the Strait of Hormuz, it will likely exacerbate existing pricing power pressures, further suppressing margin potential for ex-energy segments of the index.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
War in the Middle East and closure of the Strait of Hormuz has resulted in the largest spike in commodity costs since the start of the Russia-Ukraine war in 2022. Though the 2022 experience does not offer a perfect benchmark for what to expect this time, there are similarities in market responses – the commodity price spike and initial equity market shrug happened in the early phases of 2022’s experience as well. While the U.S. economy managed to survive the 2022 struggle without a declaration of official recession, the experience gave markets a lesson in how supply-constrained inflation surges can create earnings recessions and may set a precedent for what to expect should commodity supplies remain constrained much longer in the Middle East.
2022 vs 2026: Similarities and Differences
Every supply shock has different consequences for markets, and outcomes can be highly contingent on the nature and extent of the shock at hand. Almost certainly, the outcome of the surprising surge in commodity prices on account of war in the Middle East in 2026 will not play out precisely like the Russia-Ukraine war did in 2022. There are arguably more economic and policy differences than there are similarities between the periods. The economy was in its early cycle recovery phase after the 2020 pandemic shutdown, and the Fed was tightening rates in 2022 after letting the economy run hot in the immediate post pandemic period. Job growth averaged 0.25% MoM that year, quite the contrast to the approximately 0% average growth of the last six months. Artificial intelligence was not yet a major driver of equities – Nvidia traded for less than $20 a share. However, there is one notable similarity – commodity costs. The last time broad commodity prices (represented by Bloomberg’s Commodity Index) accelerated to their current level was in 2022. In fact, because of the recent surge in precious metals prices, the broad index has reached a higher level this year than it did at its peak in 2022.
Back then, oil prices escalated to more than $100 per barrel just 4 days after Russia invaded Ukraine, held around that level or higher through July of that year, and global food costs surged with the disruption to Europe’s breadbasket. Stocks shrugged off the initial surge, assuming the war would be short lived. In the first two weeks of the Russia-Ukraine war, the S&P 500 dropped just 0.6%.
Inflation Pressure Resulted in Earnings Recession in 2022
But as the war dragged on (and pandemic shutdowns emerged in China, further exacerbating supply constraints), prices surged. Producer price growth escalated to a peak of 11.7% year-over-year in March 2022, and consumer prices followed, topping out at 9.1% growth that year. Notably, the economy weathered the storm reasonably well. GDP slowed from its rapid 2021 recovery pace as real personal consumption (PCE) was stopped in its tracks by the diversion of spending to necessities and away from discretionary items. Real PCE growth averaged just 0.14% per month in 2022, well beneath the average pace of 0.59% per month in 2021.
The effect of the price escalations was very clear in S&P 500 earnings, even if it was not clear in the economy at large. Energy sector earnings rose to new highs in 2022, reflecting the elevation in commodity costs, but the rest of the sectors suffered. Over five quarters of decline from the end of 2021 to early 2023, S&P 500 earnings excluding the energy sector dropped. Notably, despite evidence of slowdown in GDP growth as consumers retrenched somewhat, S&P 500 revenues held up, and continued to grow. But earnings declined as margins compressed due to commodity cost pressures.
The What started as an earnings boost to the energy sector turned into a broader earnings recession for the other sectors in the index, as input costs rose quickly and compressed margins. Initially, earnings growth estimates rose, and indeed, energy sector earnings accelerated to help drive index earnings higher in the first quarter of the commodity cost spike. But ultimately, higher prices weighed on earnings for non-energy S&P 500 sectors, and tipped the index at large into an earnings recession.
Conclusion: The Clock is Ticking
There is no certainty that commodity costs will stay high as long as they did in 2022, and certainly the stage of economic conditions is different in 2026 than it was in 2022. Nonetheless, commodity prices are already matching levels touched during the inflationary surge in 2022, and present considerable risk to earnings if they do not cool in short order. Markets have greeted the crisis with relative calm, just as they did early in 2022. That year, it took 2 months of elevated commodity prices to dismantle the equity market’s sanguine view, and 5 months of elevated oil prices to create a recession in earnings. At just two weeks in, there is still time for resolution, but the clock is ticking. The longer the war in the Middle East extends, the more likely it becomes that a 2022-style earnings challenge emerges in 2026.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
Though the headline decline in the S&P 500 of 3% over the last two weeks may at first appear benign, underlying supports for the index are fading fast, as war in the Middle East has depleted breadth at the stock and sector levels. While most investors are watching the price of oil for signals, the stock market is also likely to get its cue from financials, the second largest sector by market cap in the S&P 500, and an early cycle indicator for the economy. Even if war is resolved and the price of oil calms, financials participation will be key to a durable market advance.
S&P 500 Breadth is Deteriorating
The S&P 500 is losing its breadth at both the stock and sector level, suggesting that the 3% drop in the index year to date may be masking emerging weakness. The percentage of stocks on the index that remain above their 200-day moving average has dropped near fifty, a level that usually offers support during uptrends. While short-term losses of breadth can occur with no consequence on occasion, a longer-term breakdown in breadth below the 50% level could indicate more severe stress is emerging for the index. Notably, each correction of 10% or more in stocks over the last twenty years has occurred with this confirming breadth cue.
Energy is now the only sector in the large cap index with positive short- and long-term momentum. Though the energy sector has had a stellar year, up nearly 28%, it is highly unlikely that this group can manage to hold up the market alone. At less than 4% of market cap of the index, energy is too small to keep the index afloat on its own, and its identity as a cost input to the other sectors creates broader complications for earnings. Prior to the breakout of war, staples, materials, industrials, utilities and real estate were all also posting gains this year, but all of those sectors have sold off since the war began, leaving little upward momentum remaining in the S&P 500.
Financials Cue Should be Watched Most Closely
While the markets remain captive to the price of oil in the short run, financials stocks may be the more meaningful indicator to watch for longer term market direction. Financials are the worst performer among sectors in the S&P 500 so far this year. The group is down more than 11%, more than 4X the decline in the market at large. That’s the worst 10-week performance for the sector since April 2025.
Financials entered the year with lofty expectations, indicated by valuations at levels last recorded prior to the Great Financial Crisis, which may have made the sector more vulnerable to disappointment. Nonetheless, the tough combination of private credit strains, the flattening yield curve, and threats of policy intervention in the housing and banking industries may continue to suppress returns for the group. This may remain a problem for stocks at large. Since 1990, a monthly loss in financials coincided with a monthly loss in the broad market 74.7% of the time, with financials down in 182 months and the market down 136 of those months. When financials and tech are struggling together, as has been the case for most of 2026, It is even more unlikely the market at large can rise. When financials and tech sectors both sold off, the market dropped in 94.2% of months.
While the price of oil and performance of energy stocks may continue to draw the lion’s share of attention in the near term, we think financials may offer a stronger indication of the longer-term trend. Financials loss of momentum prior to the war and continued struggles during the last two weeks is notable, and hints that even without the war, a meaningful disruption in the market and economy may be underway.
Disclosure: HB Wealth is an SEC‑registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
The S&P 500 has broken through key support at its 100-day and 20-week moving average for the first time in about a year, increasing the probability of a full correction in the index in coming weeks. There have been just 8 other instances when the market has broken down as much through the key level after a bullish advance in the last ten years. The market carried on to deeper lows in 6 of the 8 instances. The range of declines from pre-breakdown peak to ultimate low was 0% (in 2016/late 2020) to 22.5% (in 2022). On average, the declines lasted 19 weeks from pre-breakdown peak to ultimate trough, though the range is wide. The market managed to shrug off the break of the 20-week moving average in 2016 and late 2020.
A resolution of war with Iran and/or cooldown in the price surge for oil is the primary, but not the only indicator to watch for stocks. VIX has spiked but is not yet at 40 – the level that normally suggests a sentiment low is likely to emerge. Momentum (14-day RSI) may also need to drop to near 30 to suggest a low is near. Valuations are still above levels supported by macro data and will likely need to fall closer to our model’s indication of 19X before a buying opportunity emerges. Policy shifts also often create sentiment shifts. The FOMC is scheduled to meet again next week. Higher oil prices complicate matters, but if the Fed telegraphs greater chances of an ease coming due to jobs weakness, it could also help stocks find their footing.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
U.S. large cap stocks have broken down through the key 100-day moving average support level as the simultaneous gain in oil prices and deterioration in employment added to the AI-fears and private credit strains that have been nagging markets for months. It is extremely rare to see job losses and oil price surges of the current magnitude simultaneously. If war in the Middle East persists amid weak hiring, equities will likely continue to struggle, and the market will need to price rising economic recession risk.
Fragile Jobs Market Weighs on Outlook
The economy shed more than 90,000 jobs (0.06% of total jobs) last month, something that usually only happens when the U.S. is in the throws of an economic recession or trying to climb out of one. In history going all the way back to the 1930s and excluding recessions and the year just after recessions (job gains are volatile in the early stages of economic recovery), we found only 25 other single months (2.4% of total months) in which jobs dropped by at least 90K. This is less than 3% of the time.
February weakness may be due to a combination of temporary disruptions like a labor strike and winter storms, and weakness may be exaggerated by adjustments to the Bureau of Labor Statistics’ updated “birth-and-death” model of business formations. Yet, the 3-month moving average job gain was also just 5.7k. That’s down 71.3k from the same time last year as suggests a troubling trend in jobs has emerged. There is no historical precedent for job growth this weak outside of recession experiences.
Oil Shock Amid War in Middle East
As if that weren’t enough for the market to absorb, the jump in oil prices last week broke records. Brent crude oil rose 27.3% and West Texas Intermediate rose 35.3% in a single week. The magnitude of the weekly oil price gain is extremely rare. There have only been 5 other times prices jumped that much in a week in the last 35 years – all of them were during and just after the 1990 and 2020 recessions.
The price of oil is on pace for its fourth largest gain in history on a rolling 3-month basis. If the oil price gain sticks through March, it will be one of the biggest monthly oil price spikes in history. There were only 6 other months since 1970 in which oil prices jumped as much as they did last week. Notably, the economy generally struggled with these price spikes – 4 of the oil price gains occurred during or within a year of recession experiences.
Signal from Jobs +Oil is Troubling
Simultaneous job loss and oil price spikes are trouble for the economy. They have occurred very rarely and usually only around recessions. The only months in the last 35 years in which the economy sustained a job loss as large as February and oil price jump as big as that recorded so far in March (both in percentage terms), were during the Gulf War in 1990, and the recession recoveries of 2002, and 2009.
History of the economy’s ability to withstand combined oil price and job shocks that last more than three months is particularly grim. Indeed, the only time in history in which oil prices were above $90 and job losses were stacking up was the Great Financial Crisis. Each time oil prices rose more than 30% and jobs fell for three months the US fell into recession, with only one exception, and that was at the tail end of the tech bubble in 2003.
Conclusion
While the spike in oil prices may prove short lived if war in the Middle East, the rapid escalation in oil combined with the job market signal is currently not favorable for risk assets. Should the spike in oil and weakness in jobs cues continue for another few months, it will increase recession risk materially for this year. This is highly contrary to consensus expectations for economic acceleration and double-digit earnings growth, and may force continued re-pricing of risk across financial markets. As long as job weakness and high oil prices persist, they will suggest defensive strategies are likely to perform best.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.