How spiking oil prices could hurt stock prices and the economy

• The conflict with Iran caused stocks to whipsaw and oil prices to spike.
• Higher energy prices are a headwind to both markets and the broader economy.
• Increased energy prices could weigh on equities, fuel inflation, and curtail economic growth.

Oil prices spiked in the wake of the US attacks on Iran, with analysts and strategists eyeing negative consequences for markets and the economy if energy prices see a sustained rise.

Brent oil rose roughly 7% and stocks whipsawed, with the S&P 500 and the Nasdaq turning positive after being down about 1% earlier in the day.

Israel and the US launched military strikes in Iran, killing Iran's Supreme Leader, Ali Khamenei and other senior officials. Iran retaliated with missile strikes against US bases and allies in the region.

Goldman Sachs analysts say that the energy market impact is the "primary" influence the conflict will have on the global economy and markets.

Here four ways the conflict in Iran could impact the economy and markets.

1. Equities under pressure, expect volatility

US stocks saw volatile trading amid the escalation in the Middle East, but analysts say the longer-term impact on equities depends on the duration of the conflict and the scale of oil supply chain disruptions.

"The initial market response is generally to raise risk premium on the back of higher uncertainty and wider distributions," Goldman said. The analysts added that the situation is net negative for equities and credit markets.

Higher energy prices are a headwind for stocks as they raise costs for companies that sell physical goods that need to be moved, potentially impacting earnings.

Goldman highlighted cyclical sectors, particularly consumer-facing names like airlines and industrials that rely on oil, as being at risk.

Morgan Stanley said a dramatic increase in crude to above $100 a barrel would materially impact the bank's bull case for stocks this year.

Conversely, energy producers are expected to outperform with oil prices high. Jefferies analysts flagged mining and metals companies as potential stock winners.

2. Inflation outlook could complicate Fed's next steps

A dramatic jump in oil prices could stoke a fresh bout of inflation, which could weigh on the broader economy and impact the Federal Reserve's path of interest rate cuts.

"Wars tend to be inflationary," William Blair analysts wrote, underlining the uptick in government spending.

They also flagged that central banks tend to print more money, suppressing short-term interest rates to support governments' wartime spending. JPMorgan echoed a similar sentiment.

"The immediate equity selloff is not the core risk; the inflation impulse is. Energy shocks change monetary policy narratives faster than headlines do," Siebert Financial CIO Mark Malek said.

Meanwhile, consumers could face a jump in gas prices.

With affordability and the state of the economy top of mind for consumers, the strategist added, "Gasoline prices are psychologically powerful—they are the inflation number that consumers see every single day."

Freedom Capital Markets chief market strategist Jay Woods says that an extended period of higher oil prices will translate to inflation worries, as it would be "an enormous and unexpected tax on the consumer, an issue the Fed doesn't need to grapple with while under Presidential pressure to lower rates."

3. Oil spike could dent global economic growth

The conflict in Iran is a "negative shock to the global economy," economist Mohamed El-Erian said. Disruptions to global supply chains, specifically the Strait of Hormuz, could slow economic growth.

Upended supply chains, along with muted relief from OPEC+, raises the risk of stagflation hitting the global economy. JPMorgan said that a sustained decline in oil supplies will be a significant drag on economic growth globally, as price hikes threaten demand.

The US is generally better positioned relative to other oil importers, Goldman said, flagging Korea, Taiwan, Japan, Turkey, and India as major markets that are more exposed to disruptions.

4. Flight into safe haven assets

A bright spot in markets is likely to be safe havens like precious metals and the dollar.

Jefferies said that war in Iran offers an upside for commodity prices and strengthens the greenback.

Gold has gained after the strikes, adding to the precious metal's already impressive year-to-date run up.

"We believe the geopolitical and inflation factors matter more than the stronger dollar for now, and commodity prices should rise as a result," the analysts wrote.