Investors and companies have expressed that the "Red Sea crisis" is threatening their supply chains, and the Middle East war poses significant risks to their profits.
Bloomberg's analysis of hundreds of earnings conference calls shows that these unfavorable factors pose a threat to the record breaking rebound in the US stock market. So far (more than half of the first quarter of this year), the number of mentions of the Red Sea or "geopolitics" is almost the same as the total in the previous quarter.
The expectations of S&P 500 index constituent companies for profits over the next 12 months are at a record high, indicating that the market is digesting the optimistic outlook of the US economy growing faster than expected and the Federal Reserve cutting interest rates. But any significant threat to profitability, or signs of inflation returning, could affect the sustained months of gains, which have pushed the US benchmark stock index to record highs.
In addition, crude oil prices have risen this year, partly due to concerns that the war between Israel and Hamas may escalate into a broader conflict. At the same time, container ships were forced to avoid the Red Sea and the Suez Canal due to attacks by Iranian backed Houthir rebels.
"The geopolitical background is a risk," said Nicole Kornitzer, portfolio manager at Kornitzer Capital Management Inc. "If this pressure persists for a longer period of time, it may lower corporate profit margins and lead to inflation, as costs are passed on through price increases."
The latest fund manager survey by Bank of America Corp. also shows that from consumer goods companies to social media, and then to freight companies, investors view geopolitics as the second largest stock market risk after inflation, although these two risks are interrelated. Participants expect that further escalation of the Red Sea or Middle East situation will bring new price pressures to oil prices and shipping costs.
In Europe, alcoholic beverage manufacturer Heineken NV stated that macroeconomic and geopolitical developments will continue to be uncertain factors affecting its business. Adidas AG said that the tense situation in the Red Sea will lead to an increase in supply costs in the short term.
In January of this year, Tesla announced the shutdown of its German factory due to supply disruptions. Medical equipment supplier ResMed Inc. stated that it has seen the impact on shipping costs and delivery times. Computer networking equipment giant Cisco Systems Inc. also stated that shipping costs have increased.
But there are also some companies that benefit from it. Due to the interruption of the Red Sea and uncertainty in the oil market, Royal Vopak NV in the Netherlands has increased demand for its storage facilities. A.P. Moller Maersk A/S stated that it is expected that the boost from the Red Sea conflict on freight rates will disappear later this year, and the shipping industry will once again enter a downturn.
At the same time, many shoppers in Muslim countries such as the Middle East and Pakistan are avoiding large foreign brands because they are angry that the United States and Europe have not taken more measures to end Israel's attack on Gaza. This has put pressure on the profitability of major American companies.
McDonald's Corp.'s sales were lower than expected by investors, partly due to the impact of boycotts. The company expects that there will be no substantial improvement in its business departments, including the region, until the war is resolved. This war also affected Starbucks Corp.'s performance. Even Snap Inc. sees this conflict as a disadvantageous factor.
However, the war between Israel and Hamas is still ongoing, with no end in sight. The Houthi militants continue to disrupt shipping in the Red Sea, despite the United States and Britain cracking down on armed groups in Yemen, with multiple navies patrolling the waters.
Rajeev De Mello, Global Macro Portfolio Manager at GAMA, said, "Geopolitics is the tail risk that has the greatest impact on the market."