05/12/2026
Oil Price Shocks Challenge the Fed’s Path Toward Inflation Targets
From the May 2026 issue of the Investor Advisory Service:
The setup for stocks certainly looked favorable coming into 2026, characterized by expectations for accelerating earnings growth and additional rate cuts from the Federal Reserve. So what went wrong?
The conflict in Iran and the resulting impact on energy markets has placed upward pressure on inflation and downward pressure on economic growth. This has injected greater uncertainty into the equation and reduced expectations for rate cuts this year. While the pieces remain in place for a strong 2026, the picture is quite a bit cloudier than it was at the start of the year.
Some are questioning the ability of firms to deliver the robust projected earnings growth this year given the sharp rise in energy prices. Since the end of February, West Texas Intermediate oil has increased more than 40% to approximately $100 a barrel. Earlier in the conflict, WTI reached nearly $120 a barrel.
Even if an agreement were to be reached in the near term, normalization of the energy supply chain is likely to take some time. The head of the International Energy Agency indicated 13 million barrels a day of oil supply has been impacted by the conflict, while more than 80 energy facilities have been damaged.
While history suggests predictions about energy prices should be made with a healthy dose of humility, if energy prices remain higher for longer, it could further exacerbate...
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But companies with durable growth will overcome near-term headwinds.
