Skyrocketing Fuel Costs Threaten 15% Drop In S&P 500, Pimco's Erin Browne Warns

The stock market is sailing through uncertain waters, and one of the looming forces threatening its stability is the surge in fuel prices.

According to Erin Browne, the portfolio manager for multi-asset strategies at Pacific Investment Management Co. (PIMCO), equity investors might be underestimating the potential risks, including the possibility of a recession triggered by higher oil prices.

Browne recently voiced her concerns to Bloomberg, suggesting that these hazards could potentially drive the S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust SPY, down by approximately 15%.

Fuel And The Fed

Browne emphasized the significance of oil prices in the Federal Reserve’s calculations. While policymakers primarily focus on core inflation, which excludes volatile factors like food and energy, the relentless rise in oil prices could lead to increased prices for durable goods, negatively impacting the economy.

Such a scenario could make it difficult for the Fed to meet the market expectations of three rate cuts next year, Browne says. Expect a soft landing for the economy, characterized by low GDP growth but persistent inflation.

However, Browne also cautions that the economy remains vulnerable to external shocks.

What Lies Ahead

Browne also anticipates potential signals of stronger demand for goods in 2024, as consumer-oriented sectors and semiconductor companies may refill their inventories. This could set the stage for a robust earnings trajectory.

In the event of a U.S. recession, Browne predicts consumer staples and underperforming defensive sectors, like healthcare, will outperform. Conversely, more cyclical-oriented sectors like home builders, industrials, and consumer cyclicals like airline transportation, lodging, and restaurants could face challenges.

Read Also: 99% Fed Rate Hold Odds Vs. $100 Oil: Wednesday’s Make-Or-Break Moment

Earlier this month, in its latest global economic outlook, the PIMCO Global Advisory Board, chaired by former Chair of the Federal Reserve Ben Bernanke, issued a warning about the potential harm rising nationalism could inflict on global trade.

This mindset, epitomized by slogans like “America First,” “China First,” and “Russia First,” views the world as a struggle between “us” and “them.” It represents a shift away from win-win economics through trade toward the dominance of a zero-sum scenario where one party must lose for another to win.

Now Read: Fed Decision Looms: Will Steady Rates Prevail Despite Inflation Pressures?

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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