Rising energy prices test the consumer and the Fed

Dave Harrison Smith, CFA
Chief Investment Officer
March 16, 2026

Energy prices rise, consumer holds for now

The conflict in the Middle East continues, with no clear path to de-escalation. Oil has moved higher, with WTI crude closing Friday near $100 per barrel. U.S. gas prices have also risen sharply, with the national average reaching $3.80 per gallon, up from below $3.00 pre-conflict (source: gasbuddy.com).

Markets, for now, appear to be pricing in a relatively contained and short-lived disruption. Even in best-case scenarios, damage to Gulf infrastructure will likely take months to repair and return to full capacity. As a result, many analysts expect oil prices to remain elevated for much of 2026. Sustained higher energy prices feed into inflation and add pressure on consumers through rising fuel costs.

Encouragingly, the consumer entered March in solid shape. High-frequency spending data from Bank of America showed strong trends in February, and commentary from Visa and Mastercard was broadly constructive at recent investor conferences. Even discount retailer Dollar General reported strong earnings, noting that spending remains “pretty resilient from a consumer perspective.”

Historically, energy shocks act as a tax on consumers. The longer prices remain elevated, the greater the risk of demand shifting away from discretionary categories. The key question is durability.

Sticky inflation complicates the Fed’s path

The Federal Reserve faces a challenging backdrop. Energy prices have surged and will likely pressure inflation in the coming months. While the Fed has historically looked through supply-driven inflation and focused on underlying demand, inflation remains sticky and above target even before the recent escalation.

The February CPI release was mixed. Inflation has moderated but remains above the Fed’s 2% target, with core CPI rising at a 2.5% annualized pace. The read-through to the Fed’s preferred inflation gauge, PCE, may point to somewhat higher inflation given its different basket of goods. Importantly, this data does not yet reflect the recent increase in energy prices.

Inflation remains persistent, and markets have adjusted accordingly. Futures markets now price in between zero and one rate cut for the remainder of 2026.

Number of rate cuts expected in 2026, as implied by market futures

Market leadership shifts following the start of the conflict

Market leadership has shifted alongside changing rate expectations and rising economic uncertainty. For the first two months of the quarter, small-cap and value stocks outperformed, with small-cap value rising nearly 9% through the end of February. Large growth, dominant in recent years, lagged, with the Russell 1000 Growth Index down 4.8%.

Style returns, before and after the start of the Iran conflict

As the conflict escalated, that leadership dynamic began to reverse. Large-cap growth stocks, while still negative, have held up relatively better. Small-cap stocks have lagged across growth, core, and value styles, reflecting greater sensitivity to economic growth and financial conditions.

The earlier strength in small-cap and value reflected a broadening of participation across U.S. equities. Markets are now re-pricing both economic growth and interest rate expectations in real time.

# # #

The Gulf erupts, oil surges, and markets reprice

Dave Harrison Smith, CFA
Chief Investment Officer
March 9, 2026

The Strait of Hormuz closes and oil surges 60%

The situation in the Middle East has devolved into a fierce and sprawling military conflict. Iran’s response to continued Israel/U.S. strikes has entangled a dozen other countries, with tens of thousands killed or injured, civilian infrastructure shuttered, and energy production and transportation facilities abruptly offline.

Over the past week, the conflict has broadened well beyond initial expectations. This is not a repeat of the targeted strike on Iran’s nuclear facilities in 2025. Iran’s response has drawn in a wide swath of major energy-producing countries. Critically, the Strait of Hormuz—through which roughly 20%/30% of global oil/natural gas supply flows—has effectively closed to shipping traffic. Production shutdowns across Kuwait and other countries reflect not just fear of direct strikes, but a breakdown in transportation and available storage capacity. Systemic complexity is amplifying the energy disruption in ways not fully anticipated.

The impact on oil prices has been dramatic and swift. West Texas crude has spiked from $66.96/barrel at the end of February to above $110 as of this writing. At an increase of over 60%, this places it among the largest six-day moves in three decades and second only, in dollar terms, to the immediate aftermath of the COVID shutdown in 2020. Average U.S. gasoline prices have risen more than $0.50 per gallon in a single week, with further increases likely. Jet fuel has surged as well, foreshadowing higher travel costs heading into summer. Businesses and consumers are reeling.

U.S. equities hold; international markets and bonds sell off

Beyond commodity prices, the financial market reaction has been significant. U.S. equities have been relatively resilient, reflecting the United States’ position as a major energy producer since the shale boom, with the S&P 500 Index down 2.0% and the Russell 2000 Index down 4.0% on the week. International markets have fared worse: the EAFE Index fell 6.7%, and Emerging Markets declined 6.9%, reflecting both the global growth risk from spiraling energy costs and the impact of a strengthening U.S. dollar, which has functioned as a safe-haven currency.

Government bonds have also broadly sold off, failing to provide refuge. Yields on the U.S. 10-Year Treasury increased to 4.15% last week, up from 3.96% at the end of February, while the 2-Year rose from 3.39% to 3.57%. These moves reflect elevated inflation fears and a reduced likelihood of Federal Reserve rate cuts. The market is now pricing in a single cut in 2026, down from the two to three cuts anticipated just last week.

Energy price shocks create a complex dynamic. Headline inflation rises directly; so too does core inflation, as fuel and electricity costs are absorbed into the production costs of goods and services broadly. At the same time, sustained energy price increases tend to compress consumer spending, particularly among lower-income households, where food and fuel represent a disproportionate share of the budget. Our research suggests this segment of the economy is already under meaningful financial stress, and the current shock will deepen that pressure.

What history says about markets after geopolitical shocks

The news flow remains difficult, and volatility is elevated. A key question worth considering: how much risk is already priced into current market levels? The history of geopolitical events offers useful and heartening context. Past events have often followed a similar pattern: an initial repricing as uncertainty spikes, followed by stabilization and recovery as the situation becomes more legible to markets. The S&P 500 has frequently produced positive returns over the three-, six-, and twelve-month periods following major geopolitical crises, illustrating how quickly these shocks can be absorbed into market expectations.

Market returns following major geopolitical crises

Looking at recent Middle East conflicts specifically, the S&P 500 posted positive average returns over each of these time horizons, rising 11.5%, 12%, and 1% over 1-, 3-, and 12-month periods, respectively. The sample size is limited, and each conflict’s surrounding economic and geopolitical environment is different. This history is best understood as descriptive context, not a forward-looking projection.

S&P 500 Index price return around onset of select conflicts

We remain focused on where risk is concentrated and where dislocations may be surfacing opportunity. Our emphasis on quality across strategies is designed to provide relative resilience in periods like this. We continue to evaluate exposure in areas most sensitive to sustained energy cost increases—across regions, sectors, and individual companies—while remaining alert to the pricing anomalies that fear and volatility tend to create.

In our experience, periods of acute uncertainty often obscure the eventual recovery. When markets begin to anticipate stabilization, recoveries can unfold quickly and well in advance of any formal resolution. In periods of elevated uncertainty, patience and discipline remain among the most durable investment advantages.

# # #