by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
Oil prices have plummeted – down about 30% over the last year and more than 50% from their 2022 peak. While oil’s economic clout isn’t what it used to be (back in the 80s energy spending ate up 7% of income compared to just 3% now), it still packs enough of a punch to matter. In a market hyper-focused on headwinds – particularly tariffs - it’s worth acknowledging that cheaper oil is like a sneaky little tax cut. A 30% drop translates to about a 100bps tailwind for US consumers, roughly $200-$250bn in savings. Meanwhile, tariffs are a more indirect tax, making their impact harder to gauge. But with some quick math, we can estimate that if tariffs settle around 15% and half the cost hits consumers (the rest absorbed by profits), that would be roughly a $250bn drag. Sure, there’s some guesswork here, but the math illustrates a key point: if you’re worried about the negative shock from tariffs, you might be underestimating how much cheaper energy costs can cushion the blow.
The power of energy prices on stocks becomes clearer when looking at the data. There’s tends to be a linear relationship: the steeper the decline in energy prices, the more likely stocks are to be higher the next year historically. Our bottom decile decline is particularly bullish. The logic? The economic lift from cheaper energy increases the odds of an acceleration in consumption. This relationship tends to hold even though oil prices often bounce back the following year – usually not enough to offset the initial decline.
It’s natural to assume that this dynamic would benefit Discretionary stocks the most, given their consumer exposure. They do tend to outperform, but not as consistently or significantly as Technology. While the economic lift from cheaper energy helps the consumer, the impact on stocks typically works through earnings – and here, Tech wins. Lower energy prices historically correlates with better earnings growth for Tech stocks. Even if tariffs add a headwind compared to historical data, don’t overlook the fact that Technology has already priced in a lot of bad news.
Defensive sectors, like Consumer Staples and Health Care, tend to underperform after oil price declines – a pattern that aligns with my recent note on Bitcoin. When energy prices fall this hard, it often signals that the tailwind from cheaper energy boosts more economically sensitive sectors, like Tech, making them worth a closer look.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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