How vulnerable are US corporate earnings to an oil supply shock?

Amid the current geopolitical tensions in the Strait of Hormuz, investors face a crucial question: how might a major disruption to oil supply affect corporate earnings? This issue extends well beyond forecasting oil prices alone. While the S&P 500 Index includes energy companies that benefit from higher prices, most constituents would face the opposite effect – rising input costs, pressure on margins, slower consumer demand and potentially tighter financial conditions.

Assessing the impact is complex because oil price increases are not all alike. A rise driven by strong global demand typically signals a growing economy, while an increase caused by supply constraints or geopolitical tensions carries very different implications for growth and profitability.

In this week's Simply put, we examine how these dynamics could affect corporate margins over the medium term if oil supply were to contract.

Read more: Multi asset: navigating an inflation shock

Oil price rises differ in economic effect

Economic research provides valuable guidance on the consequences of an oil crisis on financial markets. Economist Lutz  Kilian (2009)¹ makes a key distinction: oil price increases driven by strong global growth have fundamentally different economic effects from those caused by supply disruptions, such as the conflict in the Strait of Hormuz.

Today's economies are more resistant to oil shocks than they were in the 1970s. As Olivier Blanchard and Jordi Galí (2010, 2013)² explain, this improvement reflects lower oil dependency, better-anchored inflation expectations and more credible central banks. Nevertheless, this resilience does not imply total immunity. Ben Bernanke, Mark Gertler and Mark Watson (1997)³ highlight that the economic damage from energy inflation can be amplified by central bank reactions and financial market conditions. Additionally, Christiane Baumeister and Gert Peersman (2013)⁴ demonstrate that the same supply shock can have different effects over time, depending on demand elasticity and oil market structure.

For equity markets, studies by Robert Ready (2018)⁵ and Willem Thorbecke (2019)⁶ reveal that an oil supply shock generally negatively affects US stocks, although the effect has diversified since the development of shale oil. Energy-intensive sectors and cyclical stocks are most affected, while the energy sector can partially cushion the shock at the index level. In today’s context, an oil crisis primarily represents a threat to corporate margins for most companies rather than a discount-rate shock. The question is therefore: how much should earnings expectations be revised in light of oil at USD 95 as a result of a negative supply shock? The answer requires some econometrics.

The impact of a supply shock on earnings

To understand the potential consequences of the Strait of Hormuz crisis, we analysed more than three decades of economic and financial data. Using a SVAR model, we isolated the effect of a reduced oil supply, distinguishing this factor from other influences such as global demand or monetary policy effects. This allowed us to observe how oil prices, interest rates and corporate earnings react in sequence to a supply shock.

Figure 1 shows the dynamic effects of a 1% decline in the oil supply. The findings are particularly relevant for investors in the current geopolitical context.

1. Oil price: a 1% decrease in supply leads to a nearly 5% increase in the barrel price after six months
2. Interest rates: the impact on 10-year US Treasury yields is modest, peaking at just 1.7 basis points, before fading
3. Corporate earnings: the most significant effect is on profits, with a rapid drop of about 1.9% after three months, persisting to around -1.6% a year after the shock.

Applying these results to the current situation, a 10% disruption in global oil supply, comparable to a prolonged blockade of the Strait of Hormuz, could lead to a 50% increase in barrel prices and a 15-20% drop in US corporate earnings over one year. This is precisely what markets seemed to have ‘priced in’ at the trough in March 2026. The message for investors is clear: oil shocks matter less through prices themselves than through their effect on profit margins and asset valuations.

FIG 1. Simulated effect of a 1% reduction in oil supply⁷

Read more: Oil prices and the Middle East conflict: the economic shock investors should watch

Why do earnings decline?

To offer investors a more concrete perspective, we break down the channels through which an oil shock affects US corporate earnings. Using an econometric model allows us to isolate two distinct mechanisms: the direct impact of oil on corporate cash flows (energy costs, margins, investment decisions) and the indirect effect via long-term interest rates (long-term rates rise with anticipated inflation, weighing on earnings prospects and capex profitability).

The results are particularly instructive:

1. Overall impact: a 5% increase in the oil price leads to a decrease of about 2.2% in US corporate earnings over 12 months
2. Direct oil/cash flow channel: this represents almost the entire impact, with a -2.1% contribution to earnings, reflecting increased energy costs, margin compression and more cautious corporate behaviour
3. Interest rate channel: contrary to expectations, the effect via higher rates remains very limited, representing only -0.2% of the total impact.

This breakdown holds in even more severe scenarios – during a 10% or even a 20% increase in oil prices, the direct channel remains dominant. The primary risk to US corporate earnings is therefore not monetary tightening but a deterioration in microeconomic fundamentals: higher energy bills, compressed margins and slower activity. In the current context where a disruption in oil supply is the concern, these results suggest that investors should focus more on a company's ability to absorb or pass on higher energy costs and less on the implications of monetary policy.

FIG 2. Decomposition of the effect of rising energy prices on earnings prospects⁸

Simply put, oil shocks primarily affect US corporate earnings through higher costs, not higher interest rates. A 50% increase in oil prices would translate into roughly a 15% decline in earnings over a year, according to our estimates.

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises and global monetary policy surprises is designed to track the latest progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

• Our world growth nowcaster declined this week, mainly driven by China, where export data weakened. The indicator is now positioned in a low but rising regime, as the share of improving data increased broadly
• Our inflation indicator continued to rise this week, with notable increases in China and the eurozone. Higher prices and costs were reflected in the strengthening signal
• Our monetary policy signal declined this week, particularly in the US. The nowcaster remains in a low but rising regime.

World growth nowcaster: long-term (left) and recent evolution (right)

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).