Oil

The longer the Strait of Hormuz remains closed, the more likely the Eurozone will experience an economic recession, as higher energy prices, supply chain disruptions, and weaker global demand slowly grind the European economy to a halt. The relief rally is running out of time. Investors should add exposure to the best-performing sectors following past oil supply shocks: Energy, pharma, and utilities.

Most of the increase in S&P 500 earnings estimates this year has stemmed from shortages. The oil shortage, which has pushed up estimates for energy companies, will fade once the military conflict is resolved. However, the shortage of semiconductors and other AI paraphernalia could persist for a while longer. As such, we are moving our recommended 12-month equity allocation from a slight underweight to neutral. We are already neutral on a 3-month horizon. 

In the US, the oil shock’s impact is more inflationary than recessionary but in the other economies, like the UK, the impact is both inflationary and recessionary. This creates relative value opportunities for bond investors. Plus, we reiterate short AUD/JPY as a trade.

The labor market showed signs of reviving in the first three months of this year, but it is yet to be determined how consumers will react to the energy supply shock. We reiterate our benchmark asset allocation recommendations, but are skeptical that S&P 500 earnings growth will meet outsized expectations over the rest of 2026.

In this report, we deviate from our base case and instead assume that there is an immediate improvement in Hormuz traffic. This exercise allows us to explore how the global oil supply shortfall could eventually be offset if the right conditions are in place.

The relief rally in stocks can continue a while longer. However, much can still go wrong. As such, we are retaining a 12-month underweight to stocks but are moving to neutral on a short-term tactical horizon.

MacroQuant recommends a strong underweight position in equities, favors a below-benchmark duration stance in fixed-income portfolios, has become neutral-to-slightly positive on the US dollar, has downgraded gold to neutral and copper to a strong underweight, and is bullish on oil.

Over the past month, oil market participants have scrambled to fill the gap in global oil supply caused by the Strait of Hormuz’s closure. While these efforts have been impressive, the scale of the disruption means they are ultimately insufficient. Upside pressures will continue to dominate energy prices until transit through the Strait of Hormuz is restored.

One month into the Iranian conflict, we take stock of how markets have moved so far and how some of the big open questions might influence them going forward. A long opportunity may be developing at the long end of the Treasury curve.