Rising Energy Costs Force a New Market Dynamic

The sharp rise in oil prices over the past week has triggered a noticeable shift in market leadership. Earlier this year we discussed how the market was beginning to broaden, with economically sensitive sectors starting to lead after a long period dominated by large growth companies. The recent spike in energy prices has quickly reversed some of that trend.

Higher oil prices effectively act as a tax on economic activity, increasing costs for both businesses and consumers. As a result, sectors that typically benefit most from strong economic growth have come under pressure, while more stable areas of the market have held up better.

Over the past weekend, the conflict involving Iran escalated from a geopolitical headline into a broader economic event. U.S. crude briefly surged to roughly $120 per barrel, one of the largest weekly increases in decades, before pulling back to start the week. Volatility also increased across global equity markets as disruptions to tanker traffic through the Strait of Hormuz began affecting physical energy shipments. This shipping route carries roughly one-fifth of the world’s oil and natural gas exports, making it one of the most important energy corridors globally.

In response to the supply disruption, the International Energy Agency (IEA) recently announced the largest coordinated release of emergency oil reserves in its history, 400 million barrels, to help stabilize global markets.

For markets, the key issue is not how high oil prices move over a few days, but how long they remain elevated. Short-lived spikes are usually manageable. However, if higher prices persist, they can begin to influence inflation expectations, business costs, and consumer spending.

This is particularly important for central banks. The Federal Reserve had been expected to begin lowering interest rates later this year, but a sustained rise in energy prices could complicate that path. If higher oil prices feed into broader inflation, policymakers may delay rate cuts until they have greater clarity on the economic impact. Markets have already started adjusting expectations, pushing the timing of potential cuts further out.

For Canada, higher oil prices can provide a near-term boost to the energy sector and government revenues, although Canadians are already beginning to feel the impact through higher gasoline prices.

Geopolitical events and energy shocks are difficult to predict and even harder to time in markets. Our focus remains on a disciplined, long-term approach grounded in risk tolerance, time horizon, and liquidity needs.

While headlines may shift in the near term, the portfolios are designed to navigate a wide range of economic environments. We recognize there are issues in the world, but our approach has always been to prepare portfolios thoughtfully rather than react to short-term events.