(Bloomberg) — Investors and companies are warning that Middle East wars pose a major risk to profits, as boycotts reduce sales and Red Sea shipping disruptions threaten supply chains.
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These headwinds endanger the record rally in U.S. stocks, according to a Bloomberg analysis of hundreds of earnings calls. By the midpoint of the first quarter, the number of references to the Red Sea or “geopolitics” roughly matched the previous three months combined.
S&P 500 companies' earnings outlook for the next 12 months is at a record high, with analysts pricing in a do-or-die scenario in which the U.S. economy grows faster than expected and the Federal Reserve cuts interest rates. It suggests that it is. A major threat to earnings, or signs that inflation is returning, could undermine the months-long rally that has pushed U.S. indexes to record highs.
Oil prices have already risen this year, due in part to concerns that the war between Israel and Hamas could escalate into a broader conflict. At the same time, container ships are being forced to avoid the Red Sea and Suez Canal following attacks by Iranian-backed Houthi rebels as part of operations against Israel.
“Geopolitical context is a risk,” said Nicole Kornitzer, portfolio manager of the Buffalo International Fund at Kornitzer Capital Management. “This could lead to inflation as this is passed on to prices.” will increase. Such a scenario is not expected. ”
From consumer goods companies to social media to transportation companies, Bank of America's latest fund manager survey also shows investors view geopolitics as the second-biggest risk to stock prices after inflation. However, participants expected that the two risks were related. Further price increases in the Red Sea and the Middle East will add new price pressures and increase oil and freight costs.
In Europe, alcoholic drinks maker Heineken NV said macroeconomic and geopolitical trends continue to be a source of uncertainty and could impact its operations. Adidas AG said tensions in the Red Sea were leading to higher supply costs in the short term.
Tesla announced in January that it would suspend production at its German factory, citing supply disruptions. Medical equipment supplier ResMed said freight rates and lead times have been affected. Computer network equipment giant Cisco Systems also said its shipping fees had increased. Chemical company Albemarle Corp., tobacco company Philip Morris International Inc. and rail services company CSX Corp. are also among the S&P 500 companies monitoring the situation in the Red Sea.
Some companies are benefiting from this situation. Dutch company Royal Vopak NV saw an increase in demand for its storage facilities due to Red Sea turmoil and oil market uncertainty. AP Moller-Maersk A/S had rebounded in the lead-up to its earnings release, but disappointed as it said it expected clouds to return to the industry in the second half of the year once the current freight rate increase effect from the Red Sea dispute wears off. did.
Meanwhile, many shoppers in the Middle East and Islamic countries like Pakistan are shunning big foreign brands, angered by the US and Europe for not doing more to stop Israel's attacks on Gaza. There is. This is putting pressure on the profits of major US companies.
Read more: Starbucks and Coke boycott over Gaza war, boosting Middle East rivals
McDonald's sales fell short of investors' expectations, partly due to the boycott campaign. The company doesn't expect any meaningful improvement in the region or other areas until the war, which also hurt Starbucks' performance, is resolved. Snap Inc. also sees the conflict as a headwind.
The Israeli-Hamas war continues to rage with no end in sight, with the Houthis attacking the Red Sea even as the US and UK target militant groups in Yemen and multinational naval operations patrol the area. continues to obstruct transportation.
“Geopolitics is the tail risk that most impacts markets in the short term,” said Rajeev de Mello, global macro portfolio manager at GAMA.
–With assistance from Sagarika Jaisinghani.
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