HSBC Asset Management says recent geopolitical tensions have pushed oil prices higher and increased market volatility. It sets out two scenarios: a brief shock that leaves current growth and profit expectations intact, and a longer spike above USD100 that could weaken growth, profits, and equity valuations. The report says the effect depends on the size, speed, and length of the move, and that outcomes differ by country. In the first case, geopolitical risk fades and global supply stays high, so the disruption is temporary and the base case can continue.

Oil Shock Scenarios And Market Impact

It adds that growth could be supported by policy support, broadening profits, and an AI capital spending boom. In the second case, a persistent rise of more than USD20, or oil above USD100 as last seen in 2022, could be more damaging to growth and could reduce profits and market valuation multiples. HSBC also models a persistent USD10 oil shock, finding developed economies would see broadly similar effects on growth and inflation. It says emerging markets would see more varied outcomes, while some US assets are “priced for perfection” and other regions have valuation gaps that may offer some cushion. With WTI crude climbing to $92 a barrel this week amid renewed tensions in the Strait of Hormuz, we are now facing the two distinct oil shock scenarios that were concerns last year. The key question for the coming weeks is whether this is a transitory event or the beginning of a persistent move toward $100. Our response must be prepared for either path, as the implications for the broader market are significant. If we believe this geopolitical risk will fade and supply will remain robust, then options strategies that bet on a price decline are attractive. This could involve selling call spreads on crude futures with strike prices in the high $90s, aiming to profit as prices revert to the mid-$80s range. This outlook assumes the supportive policies and strong corporate profits we saw through 2025 can absorb this brief disruption.

Positioning And Hedging Approaches

However, if this spike is more durable, we must consider the risk to economic growth. We remember the demand destruction and market turmoil when oil shot above $100 back in 2022. With February’s CPI data showing core inflation still running at a stubborn 3.1%, a sustained oil shock would severely limit the central bank’s ability to support the economy. In that more damaging scenario, protective puts on major indices like the S&P 500 become critical. The US market is particularly vulnerable, with the S&P 500’s forward P/E ratio sitting near 22x, suggesting it is priced for perfection. Hedging this risk through options is prudent, as a growth scare could quickly challenge such high valuations. Looking back, our analysis in 2025 highlighted the valuation gap between US markets and other regions, which now offers a trading opportunity. The MSCI Emerging Markets Index trades at a much lower 13x forward earnings, providing a relative cushion. A pairs trade using options to favor emerging market ETFs over expensive US indices could perform well if high energy prices begin to drag on global growth. Create your live VT Markets account and start trading now.

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