In recent months, oil prices have experienced a significant surge, leading to concerns about the impact on corporate profits and the broader economy. As history has shown, the aftermath of oil shocks can bring a wide range of outcomes, from negative EPS growth to impressive gains. In this blog post, we’ll delve into the resilience of the consumer, the potential for guidance and commentary to matter more than reported results, and the importance of watching for sustained disruptions that could hit GDP.

Firstly, let’s examine the historical patterns of EPS growth following oil shocks. Our team found that in the 12 months following past oil shocks, S&P 500 EPS growth has ranged from -15% to +18%, with consumer discretionary and energy sectors being most exposed in both cases. However, it’s important to note that EPS itself is not highly sensitive to oil prices, indicating that other factors may play a more significant role in determining corporate profits.

Moving on, the debate among investors has centered around the resilience of the consumer against higher gas prices. While some have expressed concerns about a potential slowdown, the majority of corporates, high-frequency data, and early EPS reads suggest that the consumer has held strong. In fact, expectations are for solid EPS growth in the consumer sector (excluding housing and packaged food) despite the weakest Mich Sentiment reading in nearly 75 years.

Given the uncertainty surrounding oil prices, it’s possible that corporates may take a “wait and see” approach, blaming the macro environment for any potential challenges. As such, guidance and commentary are likely to play a more significant role than reported results in the upcoming earnings season. Investors should keep a close eye on these factors to better understand the impact of oil shocks on corporate profits and the broader economy.