The war takes a toll on growth; but more on economic than earnings
At a Glance
The desk believes that the recent surge in oil prices, driven by geopolitical tensions, will have a more pronounced impact on global economic growth than on corporate earnings. Per the full note from BofA Global Research, they have revised their 2026 U.S. GDP growth estimate down by half a percentage point, primarily due to the higher oil price forecast, while S&P earnings remain resilient, particularly in the energy sector. This divergence suggests that while economic indicators may weaken, earnings could still hold steady, especially if driven by energy sector performance. The consensus among firms shows a mixed outlook, with targets ranging from 1.04 to 1.10 for the USD/EUR pair, indicating uncertainty in currency movements amid these developments.
Key Takeaways
- 01Geopolitical tensions are reshaping macroeconomic outlooks.
- 02S&P earnings remain resilient despite equity selloff.
- 03Market recalibration may create opportunities in select sectors.
Full Analysis
What the desk is arguing
The recent turmoil in the Middle East has started to reshape the global macroeconomic landscape, primarily through rising energy prices that are squeezing growth estimates. BofA's research indicates that while 2026 GDP projections are being cut by 0.3-0.5 percentage points, U.S. corporate earnings remain surprisingly robust, partly buoyed by strength in the energy and technology sectors.
Supporting this view, BofA's Savita Subramanian noted that despite the equity market selloff, S&P earnings have shown resilience thanks to positive revisions in earnings expectations. This suggests that the declines in equities may not reflect a broader corporate weakness but rather a recalibration of market sentiment in response to heightened geopolitical risks. The underlying message is that while growth may be under pressure, earnings could navigate these headwinds more effectively than previously anticipated.
Where it sits in our coverage
In contrast to BofA's outlook, our consensus target for the S&P 500 aligns with a more cautious assessment, with a target of 1.075 for the index. This reflects a firmer stance regarding growth risks, diverging from BofA's relatively optimistic earnings positioning. The firm spread we observe indicates a host of firms maintaining a wait-and-see approach as global financial conditions tighten.
Key firms in our coverage, such as Barclays and JPMorgan, share insights that require watching performance amidst these upheavals. Their specific targets as of December 2026 are as follows: - Barclays: 1.09 - JPMorgan: 1.10 - Goldman Sachs: 1.08
How other firms see it
The responses from other leading firms indicate a mixture of caution and selective optimism in regard to the impact of energy price surges on earnings. Goldman Sachs supports a view aligned with BofA on earnings resilience but expresses caution regarding growth outlooks, while Barclays has signaled a more cautious stance that underlines volatility ahead.
- Goldman Sachs: Aligned on earnings but cautious on growth outlook
- Barclays: Cautious stance on market volatility
- JPMorgan: Generally aligned with a focus on sectors likely to benefit from energy price fluctuations
Market Implications
The resilience of corporate earnings amidst rising energy prices could provide a buffer for equity markets, suggesting that sectors like energy and tech may outperform in the near-term as investors recalibrate their expectations for growth. However, sustained higher energy prices could still pose a threat to consumer spending and broader economic performance.
From the original
Equities drop but S&P earnings resilient for now Global markets are recalibrating as higher energy prices shift the macro outlook and force a reassessment of growth and inflation. Our commodity strategy team raised forecasts for oil prices and other commodities due to Middle East
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The desk views the escalating geopolitical tensions in the Middle East, particularly as they relate to energy supply chains, as a potential driver for volatility in FX markets. Per the full note from UBS, the ramifications of these developments could lead to significant shifts in energy prices, affecting overall market sentiment and positioning for institutions. Market dynamics have historically shown heightened sensitivity to geopolitical conflicts, and traders are advised to monitor energy price fluctuations as a signal for potential shifts in the FX landscape. Notably, Brent crude prices are already reflecting this tension, currently experiencing upward pressure in light of recent events.
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The recent attacks on Gulf energy infrastructure have introduced a complex dynamic to energy markets, with implications spilling into broader financial conditions. As outlined in the full note from UBS, while investors are currently overlooking short-term spikes in energy prices, the potential for prolonged high prices could pose risks that surpass the adaptive capabilities of economies. In particular, the mention of U.S. political ramifications highlights a growing awareness of the interconnectedness of foreign conflict and domestic economic stability, potentially suggesting an early withdrawal from ongoing geopolitical tensions. Given these factors, the desk maintains a cautious outlook on market stability as energy price disruptions persist.