The ongoing war in the Middle East is causing alarm among investors and companies as they anticipate potential consequences on earnings. The boycotts and disruptions in shipping routes through the Red Sea are impacting sales and supply chains.
This poses a significant risk to the current record-breaking rally in US stocks, as highlighted in a recent Bloomberg analysis of earnings calls. References to the Red Sea and “geopolitics” in these calls have increased significantly compared to the previous three months.
Expectations for profits at S&P 500 companies in the next 12 months are at a record high, indicating that analysts are optimistic about the US economy’s growth and potential rate cuts by the Federal Reserve.
However, any significant threats to earnings or signs of inflation could disrupt the months-long rally that has propelled the US benchmark to historic highs.
The conflict between Israel and Hamas has caused a rise in crude oil prices due to concerns about a wider conflict. At the same time, attacks by Iran-backed Houthi rebels have forced container ships to bypass the Red Sea and Suez Canal, impacting global trade routes.
According to Bank of America Corp.’s latest fund manager survey, geopolitical risks are the second-largest concern for investors after inflation. Participants anticipate that an escalation in the Red Sea or the broader Middle East would intensify inflationary pressures, particularly on oil and shipping rates.
Various industries, from consumer goods to social media and freight companies, are feeling the effects of these disruptions.
Companies such as Heineken NV, Adidas AG, Tesla Inc., ResMed Inc., Cisco Systems Inc., Albemarle Corp., Philip Morris International Inc., and CSX Corp. within the S&P 500 are closely monitoring the situation in the Red Sea.
While some companies, like Royal Vopak NV, have seen increased demand for storage facilities due to disruptions in the Red Sea and uncertainty in the oil market, others, like A.P. Moller-Maersk A/S, are cautious about potential industry challenges later this year when the boost to shipping rates from the Red Sea conflict diminishes.
On the retail front, the ongoing war and Houthi disruptions have led to boycotts of major foreign brands by consumers in the Middle East and Muslim nations, protesting against perceived inaction by the US and Europe regarding Israel’s offensive in Gaza.
This has resulted in a decrease in earnings for significant US businesses, such as McDonald’s Corp., Starbucks Corp., and Snap Inc. All of these factors contribute to the complexity of the situation and add uncertainty to global markets.
