The S&P 500 is hitting new record highs, suggesting Wall Street is largely overlooking the volatile situation in Iran. However, for individual companies, the conflict is taking a toll.
War Impact Spreading Across Sectors
As first-quarter earnings reports emerge, evidence mounts that the war's impact extends beyond logistics and transportation. The conflict has raised costs for container manufacturer Sonoco Products Co. and weighed on sales for industrial conglomerate Honeywell International Inc.
"Those are the canaries in the coal mine," said Mark Malek, chief investment officer at Siebert Financial. "The market's ignoring them for now, trading straight up. I'm constructive, but I'm very cautiously constructive here."
Strait of Hormuz Remains Closed
Almost two months since the Middle East war began, the Strait of Hormuz remains effectively shut. This keeps commodity prices high and exacerbates rising logistics costs.
Earnings reports across industrial, materials, and energy sectors highlight these headwinds. Honeywell reported that the war caused weakness in one of its business lines, contributing to a second-quarter profit outlook below estimates. Oilfield services company SLB Ltd. said disruptions from the war weighed on its results.
Energy, freight, and petrochemical costs are rising quickly for Sonoco, which expects up to US$10 million in new expenses in the current quarter.
Consumer Sectors Most Vulnerable
For jet-engine maker General Electric Co., the risk is that airline demand falters due to travel disruptions or higher fuel prices. CEO Larry Culp told investors the assumption is that the war and its impacts last through the summer.
"The consumer sectors are most vulnerable," said Melissa Brown, head of investment decision research at Simcorp. "Higher oil prices divert spending from other discretionary items as people have to drive and may also drive up prices as input costs rise."
Even beaten-down stocks faced investor scrutiny. Shares of Southwest Airlines Co. dropped after a cautious tone on higher fuel costs, widening its decline since early March to 20%. Carnival Corp. cut its guidance citing the conflict, extending its share-price decline since the war began to 14%.
As traders brace for the busiest earnings week, there is risk of more bitter surprises ahead. Gains in large technology companies, largely shielded from geopolitical risks, have offset worries across the market-cap spectrum.
