The economic warning stock market bulls are probably forgetting

Stock market bulls should remember one important lesson: The economy could eventually reflect geopolitical realities, and one of those realities in today’s market is super-elevated oil prices.

“The global economy has weathered the oil shock reasonably well so far. However, the risk of a recession will increase meaningfully if the Strait of Hormuz remains closed into June,” BCA Research chief strategist Peter Berezin warned in a new note.

“Historically, oil shocks have had a lagged impact on economic activity, with the maximum impact on GDP growth being reached four quarters after the shock, and the maximum impact on the level of real GDP being reached six quarters after the shock,” Berezin added. “The impact of higher oil prices on the stock market has also tended to come with a lag, largely because stocks respond more to the economic damage from the oil shock rather than the shock itself.”

The economy and the markets: Amid the ongoing Iran conflict that began in late February, the US economy has displayed a Jekyll-and-Hyde dynamic, characterized by a record-setting stock market and a resilient labor market that has clashed with historic lows in consumer sentiment.

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The S&P 500 (^GSPC) recently touched a new closing high of 7,230.12, driven by a strong corporate earnings season and continued massive investment in artificial intelligence infrastructure. This Goldilocks narrative for investors was further bolstered by the April jobs report, which showed nonfarm payrolls increasing by 115,000 and the unemployment rate holding steady at 4.3%. The signal in the wake of the jobs report is that the economy is still adding jobs despite the geopolitical strain.

However, the reality for everyday Americans is far more grim, as reflected in the May University of Michigan Consumer Sentiment Index, which plummeted to a preliminary reading of 48.2 — the lowest since the survey began in 1952.

According to the survey, consumers are feeling “buffeted by cost pressures,” specifically soaring gas prices that have topped $5.00 a gallon in some regions due to the war’s disruption of the Strait of Hormuz. While the stock market celebrates corporate efficiency and AI-led productivity, the average household is increasingly anxious as year-ahead inflation expectations remain high, creating a noticeable divide between the record-high headlines on Wall Street and the all-time-low sentiment on Main Street.

At some point soon, key data points like the jobs report and various manufacturing surveys could begin to reflect more economic uncertainty, as Berezin laid out.