Trendlines: Global growth outlook hinges on duration of energy shock

Entering 2026, the global economic narrative centered on a long-awaited alignment. After years of uneven performance, leading economic indicators signaled that the global economy, particularly in international developed markets, was finally emerging from a multi-year bottoming process. This expansion was underpinned by improving corporate fundamentals, a global decline in interest rates, and robust expansion in fiscal support.

The United States, characterized by steady economic growth, easing inflation, and a resilient, but softening, labor market functioned as the primary engine for global stocks to rotate into more balanced growth across sectors. However, the conflict in the Middle East has shifted the calculus.

The current disruption at the Strait of Hormuz affects oil and liquified natural gas flows on the order of one fifth of global daily supply, even after accounting for limited rerouting capacity. In contrast, the Russia Ukraine war in 2022 disrupted roughly 2–3 million barrels per day—about 3% of global oil supply—and Russian exports were partially displaced rather than fully removed. In absolute scale, this makes today’s shock several times larger than recent wartime disruptions and the most severe oil chokepoint event in modern history.

The global economy, while fundamentally healthier than it has been in years, is now facing an energy shock brought about by the sudden rise in energy prices. This disruption tests the durability of the recovery and challenges the assumption that the global economy could withstand a major supply interruption.

In terms of the market impact, all major asset classes—stocks, government bonds, credit markets, currencies and commodities—have been subjected to heightened volatility in recent months as the Iran conflict has required ongoing reassessment amid changing conditions.

Assessing the growth vs. inflation trade-off

The primary mechanism through which this conflict threatens the recovery is the emergence of a regressive "oil tax." While the share of energy in total household spending is currently below historical averages, softening the immediate impact, the sensitivity of the economy to oil prices remains significant.

Exhibit 1: The share of gasoline and other energy sources in spending is below the long-term average

January 1991 to January 2026. Personal consumption expenditures measured in current dollars at a seasonally adjusted annualized rate. Source: Macrobond

The consequences are twofold:

1. As fuel prices rise, discretionary income is being squeezed, particularly for lower-income households and consumers. Historically, persistent oil shocks exert the most significant reduction in spending on goods. Unlike short-term shocks, which the market often "looks through" or temporarily ignores, a sustained disruption alters behavior, forcing a shift in spending away from discretionary categories and toward essentials.
2. Corporate sectors, particularly those in manufacturing and logistics, are now contending with higher costs of materials and energy. While recent manufacturing data showed signs of a nascent recovery, rising energy costs threaten to reduce profit margins and slow business spending plans that were only recently beginning to pick up.

Stagflation and the central bank dilemma

We believe the Federal Reserve’s current approach to policy decisions is increasingly defined by a desire to avoid an error in hiking rates or keeping rates high for too long, even as energy-driven headlines complicate the near-term inflation outlook.

While an oil supply disruption typically triggers concerns regarding broader inflation effects, we view the current episode primarily as a growth shock rather than a catalyst for a persistent inflationary spiral. The distinction lies in the household budget constraint where lower-income consumers lack the financial capacity to absorb sustained price increases.

Consequently, higher oil prices do not generally show up in core inflation since they act as a tax on real income and spending power, reducing total spending and limiting the ability of companies to raise prices. As businesses report growing price sensitivity among their customer base, the ability to pass on higher energy costs could diminish, effectively doing some of the Fed’s restrictive work for them.

Exhibit 2: Higher energy prices will put more pressure on real disposable incomes

Real disposable personal income measured in chained dollars and seasonally adjusted. Source: Macrobond

The short-term jump in energy prices may force the Fed to delay resuming interest rate cuts to avoid compounding the inflationary impulse; however, if this delay leads to a significant erosion in consumer demand, the Fed would likely be compelled to cut more aggressively to match the deteriorating spending environment.

Investor expectations have shifted in the direction of no rate cuts in 2026, though market-based inflation measures continue to suggest the oil shock will be temporary, providing central banks the flexibility to maintain their current policy until the data clearly dictates a shift.

If oil and interest rates remain elevated simultaneously, the market may begin pricing in a stagflationary narrative of slowing growth and persistent inflation. For now, we have seen several indicators of short-term inflation expectations rise, while longer-term inflation expectations remain anchored. However, we believe the economy can tolerate a temporary energy spike. Ultimately, we believe the Fed's path will be determined by how quickly energy prices decline and whether the softening labor market needs more aggressive support.

Exhibit 3: Inflation expectations rising in the short term but steadier longer term

Median survey result from January 2019 to March 2026. Source: University of Michigan Survey of Consumers

Scenarios for the duration of conflict

The long-term economic impact is highly dependent on the duration of the conflict. We categorize potential outcomes as follows:

• De-escalation: In a scenario where shipping channels normalize within 1-2 weeks, we anticipate Brent crude prices stabilizing back toward their pre-conflict levels. This would allow the global recovery to regain its footing with minimal long-term scarring.
• Ongoing disruptions: If traffic flow recovers gradually over 1-2 months, we project Brent remaining between $90 and $100/barrel through the first half of 2026. This would be a material drag on global GDP growth.
• Effective closure: A sustained, multi-month interruption would likely push prices above $120/barrel. Market prices do not currently reflect this scenario, which would cause a sharp drop in oil demand to restore global supply-demand balance. A demand decline of this size would likely coincide with recessionary conditions.

Markets confront a test of confidence

The current market environment represents a test of confidence. While economic and corporate fundamentals are solid, the duration of the disruption will determine whether this synchronization stalls or successfully navigates this conflict-driven disruption.

U.S. equities have returned to record highs, interest rates have been largely rangebound, and long-term inflation expectations remain well-anchored. Furthermore, the oil futures market signals that higher energy prices are expected to be a short-term phenomenon rather than a permanent or long-term shift.

We believe markets can effectively navigate short-term oil spikes, as prices typically peak within a three-month window. While energy headlines currently dominate the global narrative, the longer-term question is whether this move constitutes a genuine end to the global growth cycle.

Prior to this shock, indicators of corporate strength were firm and improving. Notably, earnings forecast upgrades still exceed downgrades, with both the Nasdaq 100 and S&P 500 maintaining upgrade momentum since last May as the U.S. continues to lead the global earnings recovery.

Exhibit 4: Profit growth accelerates globally, led by the U.S.

January 1, 2016 to March 16, 2026. Source: Bloomberg

Ultimately, the trajectory of the recovery will depend on how fast and far energy prices eventually decline. For example, the 2022 reversal—when Brent crude oil fell from roughly $125 to $75 in just six months—is a recent reminder of how quickly supply-driven shocks can unwind once pressures ease. We expect investors to remain positive over a 6 to 12 month horizon while preparing for increased volatility in the near term.