By Lewis Krauskopf

NEW YORK (Reuters), – U.S. Stock Market Investors are assessing the likelihood of more volatility from rising global energy costs. These could increase inflation, erode profits margins, and cause consumer spending to drop.

After Monday’s losses, stocks rebounded after a 5.2% drop from the September record. Although there was some relief from the truce reached by the U.S. Congress in order to prevent a default on debt, investors are still concerned about inflation and higher U.S. Treasury yields as well as the Federal Reserve’s plans to end its easy money policy.

Inflation is a significant factor. Companies will report their third quarter results next week. The oil price has risen more than 25% in the last month of August. It has climbed to $80 per barrel, and hit three-year records. Political leaders are concerned by the explosion in oil prices across Europe.

Oil prices have a “roughly neutral” affect on overall corporate earnings, according to Goldman Sachs (NYSE:) strategists, with every 10% increase in Brent prices boosting S&P 500 earnings per share by 0.3%.

While energy shares rose as crude oil prices increased, higher prices can still weigh on businesses ranging from transport to consumer discretionary companies.

“We are going to find out if this piece of the inflation puzzle is the straw that breaks the camel’s back and actually starts cutting into margins,” said Art Hogan, chief market strategist at National Securities. When energy prices rise, there are always incremental costs.

Despite September’s pullback, the S&P 500 remains up about 17% so far in 2021. Wall Street strategists point out the risks associated with investing in equities, even though investors have rushed to take advantage of the latest dip.

Capital Economics analysts stated in a note, that higher energy prices may put upward pressure on yields. In recent weeks tech shares have suffered from a spike in yields.

Michael Arone is chief investment strategist and said that if oil prices continue rising towards $100 per barrel it could “continue to weigh on sentiment.” State Street (NYSE:) Global Advisors.

“If we break that barrier, I think it will influence how people are forecasting economic growth and inflation and interest rates, which has broad implications for sectors and industries and markets,” Arone said.

As oil gained since late August, the S&P 500 energy sector has increased 25% against a 1% drop for the overall index. The only sector that posted a positive September performance was energy.

Oil vs U.S. stock market in 2021 https://fingfx.thomsonreuters.com/gfx/mkt/jnvweweglvw/Pasted%20image%201633718533077.png

The energy sector comprises less than 3% of the weight of the S&P 500, however, and rising oil prices can raise fuel and other costs for companies such as transportation firms, while also threatening demand by leading consumers to pay more, such as for gas at the pump.

JPMorgan (NYSE 🙂 strategists have highlighted a range of stocks adversely affected by oil at $100 per barrel in a note this Week. This includes package delivery company FedEx, discount retailer Dollar Tree and O’Reilly Automotive.

U.S. economists wrote last week in a note that the U.S. Deutsche Bank (DE:). According to the DE:, the 101 cent increase in gasoline prices from one year ago would lead to an expected decrease in income available for non-energy goods of around $120 billion.

According to Jack Janasiewicz of Natixis Investment Managers Solutions, however, relative consumer gasoline spending and other energy expenses has trended down over the past forty years.

Janasiewicz reported that gas and other energy expenditures have fallen in percentage from more than 6 percent in the 1980s, to just 2.35% recently.

JPMorgan strategists predicted that oil markets could digest it at $130 per barrel as long as consumers and the economy “functioned just fine” in 2010-15 when oil was above $100.

The strategists stated that they don’t believe the energy price currently in effect will cause a major economic downturn.