Markets continue to rise despite the Iran war and a host of other concerns, but the smart money has quietly settled on a gauge to see when things could turn downward – and all eyes are on oil prices, On The Money has learned.
Specifically, the warning level I’m hearing from CEOs, hedge fund types and high-net-worth brokers is closer to $120 per barrel. If you believe this sentiment, this is very good news given that even as the conflict in the Persian Gulf rages, the price of oil is still hovering around $80 per barrel.
Does this mean you should start buying stocks? Well, a few words of caution. First, oil prices can change quickly, and the situation in Iran is volatile. I discovered that there is also a minority view that any conflict that disrupts oil supplies – even if it is mostly Iranian oil bought by the Chinese, is bad for the global economy.
Certainly the people I talk to are very optimistic that the worst-case scenario is not out of the question. Here’s the math from a financial services executive: Corporate profits, especially those in the financial sector (which happen to be the plumbing of the economy and markets), are doing great. See the latest earnings from JPM, Goldman Sachs, and the rest.
Spending on AI remains plentiful and yields productivity gains. This is “a great backdrop for strong long-term markets,” says the CEO source. His warning is that higher oil prices could “weaken financial performance” by increasing inflation and putting pressure on profit margins. But he adds that this will only happen if the price of oil remains above $120 for several months, and even then it will only have a “short-term impact on the markets.”
Why not in the long term? Well, American companies are very good at improvising and we produce a lot of oil here, so this can’t turn into another 1970s shortage.
What makes $120 a barrel a magic number? You may remember that when the Iranian bombing started in March, oil prices reached this level and the markets collapsed dramatically. The reason has to do with traders’ risk parameters and how oil at that price seeps through the economy through inflation, putting pressure on consumer spending and corporate profits.
But the markets have been booming ever since. While the ongoing and intermittent war with Iran has kept oil prices volatile, investors are now more concerned about the continued benefits of AI spending and productivity gains.
So the question becomes: Will we reach that magic $120 if the fighting intensifies? Yes, but again, the smart money on Wall Street believes that in order to disrupt the market, it must continue for a while because the economy alone is doing well, as are breast milk, stock prices, and corporate profits.
Note that there is also a significant minority view — also held by some smart people inside the White House — that renewed conflict is a dangerous game. These are people like Vice President J.D. Vance, who have never been mad about a protracted conflict – not just because it increases the chances of boots on the ground and heavy American casualties – but because of the economic consequences.
Oil prices rising above $120 per barrel, even for a few months, would exacerbate inflation and interest rates, making it more difficult to finance the growing US deficit coupled with armed conflicts. Higher interest rates will also crush stocks and reduce consumer spending, leading to stagflation.
This argument won success inside the White House with President Trump, which is why he tried to negotiate a deal, I was told, so that Iran continued to renege on its various promises regarding nuclear weapons and the Strait of Hormuz.
But again, the smart Wall Street people I talked to aren’t ruling out this doomsday scenario. They feel that any conflict will not last for several months and that the United States is now energy independent. In addition, oil-rich countries (such as the Saudis) were looking for an alternative solution to the Strait of Hormuz, as the Islamic Republic, which is on its last legs, still has sufficient supplies of drones.
In other words, watch the oil, but also keep calm, and beware the pessimists.