Wall Street Braces for Inflation Shock: Will Q1 Earnings Survive the Middle East Oil Spike?

A fresh read on inflation and initial company results next week could start to show the Middle East war's effects on the U.S. economy and corporate America, as investors hope to start moving past a conflict that has consumed markets.

Traders were wrestling with conflicting signals about a potential winding down of the war that began over a month ago, with the U.S.-Israeli military strikes on Iran.

The S&P 500 posted a gain in the holiday-shortened week, snapping a five-week streak of losses. The benchmark index earlier in the week closed its worst-performing quarter since 2022, weighed down since late February by the war and the resulting surge in energy prices.

"It's going to be hard to get the market's attention off the Middle East, oil prices and the risks that have emerged," said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. "The markets have been so myopically focused on geopolitical risk and ... how all this is going to shake out."

Stocks have stumbled this year, with concerns about artificial-intelligence disruption and private credit weakness compounding uncertainty over the Middle East conflict. The S&P 500 was last down nearly 6% from its late-January all-time high.

The war's impact on oil supplies and energy prices remained the focal point for investors, especially the status of the Strait of Hormuz, a critical Middle East oil-shipping channel where traffic has stalled. U.S. crude topped $110 a barrel on Thursday after the commodity earlier in the week settled above $100 a barrel for the first time since 2022.

"The market is pricing off oil," said Doug Huber, deputy chief investment officer at Wealth Enhancement Group. "Inflation expectations, bond markets -- everything is stuck to this concept of what oil is doing."

CPI TO JUMP, HIGH PRICES AT THE PUMP

Next week's consumer price index, a closely watched inflation gauge, stands as an early test of the war's energy shock. With U.S. crude jumping some 90% since the start of the year, the U.S. average gasoline price rose above $4 a gallon this week for the first time in more than three years.

"We think the first stage of oil price pass-through will have arrived in March via motor fuel," BNP Paribas said in a note previewing the CPI report.

The March CPI report, due on April 10, is expected to have climbed 0.9% on a monthly basis, according to a Reuters poll as of Thursday. Excluding energy as well as food prices, the "core" CPI level is expected to have risen 0.3%.

Miskin said he would look for "ripple effects" across other goods and services stemming from the war and energy-price surge, while adding that the March report may be too soon to see any broader inflationary impact.

"You're just trying to get as much real-time data as you can to formulate where the inflation and economic growth trends are going," Miskin said.

Q1 RESULTS LOOM, WITH BIG PROFIT HOPES

War-driven inflation worries have led markets to largely rule out interest rate cuts this year, after such cuts had been a key underpinning for many bullish stock outlooks.

"The market already has inflation on the brain," said Patrick Ryan, chief investment strategist at Madison Investments. If CPI were to "surprise with a much higher print, that could also be something that the market would take negatively."

Next week also brings the release of another inflation measure, the personal consumption expenditures price index, but that PCE data will cover February, a period largely before the war took hold. An updated read of fourth-quarter U.S. economic growth is also due, while investors will also analyze Wednesday's release of the minutes from the Federal Reserve's March meeting for any clues about the future path of rates.

The start of earnings season also will start grabbing Wall Street's attention, with investors counting on a broadly strong corporate profit outlook to support U.S. stocks this year. Delta Air Lines and beverage maker Constellation Brands are among those due to report next week.

Those reports will offer a taste of the first-quarter reporting season, which kicks off the following week. S&P 500 companies overall are expected to post a 14.4% rise in first-quarter earnings from the year-earlier period, according to LSEG IBES.

"The Q1 earnings season beginning in mid-April should show that underlying earnings growth is still strengthening and broadening," Deutsche Bank equity strategists said in a note.

(Reporting by Lewis Krauskopf, editing by Colin Barr)

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