Oil prices climbing back above US$100 a barrel are adding pressure to equity markets, as investors weigh the impact of prolonged geopolitical tensions and higher energy costs.

BNN Bloomberg spoke with Scott Chronert, head of U.S. equity strategy at Citi, who said uncertainty tied to the Iran conflict and shifting macro expectations is challenging earlier hopes for broader market gains.

Key Takeaways

1. Rising oil prices are challenging expectations for broader equity gains built on a soft-landing economic scenario.
2. Companies are expected to deliver solid earnings but issue more cautious guidance due to geopolitical and pricing uncertainty.
3. The duration of the Iran conflict and sustained higher oil prices remain key risks for inflation and consumption.
4. Multiple unresolved factors, including private credit risks, AI disruption and tariffs, are contributing to ongoing uncertainty.
5. Large-cap growth stocks continue to show relative strength, while small caps face greater pressure from macro headwinds.

LINDSAY: Oil, meanwhile, is back above US$100 a barrel, climbing after Tehran ruled out direct talks with Washington to help resolve the Middle East conflict. The rebound follows Monday’s sharp selloff. What does this mean for the broader market? Let’s get some perspective from Scott Chronert, head of U.S. equity strategy at Citi. Good morning, it’s good to have you with us.

SCOTT: Hi, Lindsay. Good to see you.

LINDSAY: Markets were broadening earlier this year — you’ve pointed that out. How is the war in Iran weighing on your outlook now?

SCOTT: The broadening argument was really based on a Goldilocks economic backdrop — soft-landing conditions alongside an easier Fed. That was expected to support broader earnings growth across sectors, including U.S. small- and mid-cap stocks. What’s happened with the rise in oil prices as a result of the Iran conflict is that it’s begun to call some of those assumptions into question, particularly that broadening playbook.

LINDSAY: We’ve been watching closely how oil prices could affect everything heading into the next earnings season. How do you see that playing out?

SCOTT: Over the next month or so, we need to work through the Iran conflict itself, and we’re watching the oil futures curve closely. As we head into the first-quarter reporting period, we expect another round of solid earnings results, similar to what we saw in Q4. However, the difference this time is that most companies will likely be more cautious in their outlooks, given the uncertainty tied to the Iran conflict and higher oil prices.

LINDSAY: You mentioned uncertainty. With Tehran denying talks with the U.S., despite comments suggesting otherwise, does that add another layer of uncertainty for investors, or does it ultimately come down to prices?

SCOTT: The news flow over the past three to four weeks has been highly uncertain. What we’re really focused on is the duration of the conflict and, by extension, how long oil prices remain elevated. It’s the change relative to prior expectations that matters most. We entered the year expecting WTI in the mid-US$60 range, and now the futures curve suggests something roughly US$10 higher. That shift feeds into inflation and pricing dynamics, creating an overhang on what has otherwise been a relatively healthy consumption environment.

LINDSAY: Beyond the Iran conflict, you’ve highlighted other factors — private credit uncertainty, AI disruption and funding concerns. Do any of those stand out?

SCOTT: It’s a long list. The Iran conflict and oil are the most immediate concerns and could have a sort of black swan potential if they persist. Private credit is more of a contained tail risk, but still something we need to factor in. AI disruption is more of a longer-term issue — it can be both a productivity driver and a source of disruption. We also still have unresolved tariff issues following court rulings. Overall, we’re dealing with several unresolved risks, and over the next one to three months, we expect to gain more clarity. In the meantime, uncertainty is likely to persist and will keep the focus on downside risks for U.S. equities.

LINDSAY: Given that backdrop, are there sectors that could still outperform or act as a safe haven?

SCOTT: We see the U.S. as a relative safe haven compared to the rest of the world. Within that, large-cap growth — particularly mega-cap tech — stands out. These companies are somewhat insulated from oil price pressures, and their fundamentals remain strong, especially with ongoing AI-related investment. In software, which faced pressure earlier this year, we’re seeing signs of stabilization as valuation concerns get priced in.

LINDSAY: And finally, what about small caps versus large caps?

SCOTT: Small caps were a key part of our outlook earlier this year under that broadening thesis. But that relied on a soft-landing, easier Fed environment, which is now less certain as yields move higher. Small caps are more economically sensitive, so they’re more exposed to negative macro factors like higher oil prices and tariffs. For now, we’re stepping to the sidelines on small- and mid-cap exposure, with a view to reassess in the coming months.

LINDSAY: We’ll leave it there. Scott Chronert, head of U.S. equity strategy at Citi. Thanks for your time. Reference