Friday 5th June 2026
Oil shocks hurt markets, but expensive stocks have often fared worse
Oil shocks can unsettle clients, but history suggests valuation matters. Cheap stocks have often fallen less and recovered faster than expensive peers.
The latest conflict in the Middle East has revived a familiar concern for advisers and their clients. An oil-rich region is under pressure, and energy prices are rising. An oil-rich region is under pressure, and energy prices are rising. That is reigniting inflation fears and raising a familiar question: will central banks be forced to keep monetary policy restrictive for longer?
That sequence is hardly new. Oil supply shocks have disrupted markets for more than five decades, from the Arab Oil Embargo and the Iranian Revolution to the Gulf War and Russia’s invasion of Ukraine.
What is more interesting is not simply that markets fall when oil prices rise. It is that different parts of the equity market have historically responded in very different ways.
In an April 2026 note, Pzena Investment Management argues that the current conflict is “eliciting strong feelings of déjà vu from investors”, with another war in an oil-rich region constraining supply, boosting energy prices and raising the prospect of higher inflation and restrictive monetary policy.
Yet the manager also cautions that the conflict “doesn’t exist in a vacuum”, because other economic tailwinds may act as counterweights.
Valuation has mattered in past oil shocks
The key point is that oil shocks have not punished all equities equally. Pzena analysed four prior oil shocks: the Arab Oil Embargo, the Iranian Revolution, the Gulf War and Russia’s invasion of Ukraine. The study compared cheap stocks against expensive ones, where cheap meant the lowest quintile on price-to-book and expensive meant the highest.
The conclusion is direct. The note states:
“In each of these prior oil shocks, the initial drawdown of the cheapest quintile of stocks was either comparable or less severe than that of the most expensive quintile of stocks, and their recovery was decidedly more powerful.”
The average numbers are striking. Across the four episodes, cheap stocks had an average drawdown of 22 per cent, compared with 31 per cent for expensive stocks. Their recovery also came far more quickly, taking an average of 16 months compared with 40.75 months for expensive stocks.
For clients, this provides a useful counterpoint to the instinctive reaction that oil shocks are uniformly bad for equities. They are clearly destabilising, especially if higher energy prices persist, but valuation starting points can shape the severity of the drawdown and the speed of recovery.
Expensive stocks are more exposed to the rates channel
The reason is not just oil. It is the way oil feeds into inflation, interest rates and duration risk. If the current oil shock persists, Pzena warns that growth could stagnate alongside higher inflation and interest rates. Expensive, longer-duration equities are most exposed, with a greater share of their valuation tied to distant future earnings.
The Arab Oil Embargo offers the clearest historical example. The US economy was already on “dangerous footing” heading into the 1970s, Pzena notes. Expansionary fiscal policy had driven inflation from under 2 per cent to more than 6 per cent in the space of a decade.
When the oil shock arrived, the economy was improving but not strong enough to absorb materially higher energy prices.
In that environment, cheap stocks materially outperformed expensive stocks. Pzena points to the expensive and longer-duration “Nifty Fifty” cohort, which “fizzled out in the face of higher inflation and interest rates.”
The drawdown data shows cheap US stocks fell 35 per cent during the Arab Oil Embargo period, while expensive US stocks fell 58 per cent. The recovery gap was even wider, 30 months for cheap stocks against 84 months for expensive stocks.
A similar pattern emerged after Russia’s invasion of Ukraine. Inflation was already elevated due to the pandemic stimulus period, then the oil price spike intensified the pressure. Cheap world stocks fell 23 per cent, compared with a 34 per cent drawdown for expensive world stocks. Cheap stocks recovered in 12 months, while expensive stocks took 32 months.
Oil is only part of the story
History also shows why we should avoid treating every oil shock as the same event. Crude prices rose by approximately 200 per cent during the Iranian Revolution. Yet Pzena notes the drawdown in global stocks was short-lived. Corporate earnings for the S&P managed to grow over the period, along with both nominal and real GDP.
The Gulf War provides a different lesson. Because interest rates were already high when Iraq invaded Kuwait in August 1990, the US Federal Reserve had room to cut. Pzena argues that the transitory oil price spike, combined with accommodative monetary policy, helped lay the foundation for an equity rally once crude prices peaked.
This matters for portfolio conversations today. The question is not just whether oil prices rise, but whether the rise is sustained, whether inflation expectations become embedded, whether central banks have room to respond and whether corporate earnings can absorb the hit.
The practical message is that oil shocks should not automatically trigger a broad retreat from equities. They should, however, sharpen the focus on valuation risk. Expensive stocks may look defensible when growth is scarce and discount rates are falling, but they can be more vulnerable when energy shocks lift inflation and rate expectations.
The broader lesson is the same one that often emerges during periods of market stress: price matters, starting valuations matter.
When macro uncertainty is loudest, the gap between owning durable businesses at sensible prices and owning expensive assets priced for perfection can become much more visible.
Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.
