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Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's chief cross asset strategist. Today, how the latest energy shock is rippling across every major asset class. It's Thursday, April 2nd at 10:00am in New York. Right now, the markets aren't just reacting to oil, they are being shaped by it. The path of energy prices is quickly becoming the lens through which investors interpret everything else quite growth, inflation policy and ultimately risk appetite. And depending on where oil settles, the market story could look very different. From here. The starting point is simple. The baseline for energy prices has shifted higher. If tensions ease, our chief commodity strategist Martin Ratz, expect oil to settle around $80 to $90 per barrel in 2026, quite a step up from what we saw in 2025. If constraints persist, that rises to 100 to $110 per barrel. And in a more extreme scenario where supply disruptions intensify, oil can reach $150 to $180 per barrel. Now at those higher levels, the impact becomes nonlinear. Oil stops being just an inflation story and starts weighing directly on demand and growth. That's why we see the current environment as binary. Markets either revert to their pre shock trajectory or they began pricing in a much tougher mix of tighter policy and weaker growth. To make sense of this, we frame the outlook through three scenarios. In a de escalation scenario, supply disruptions ease quickly and oil stabilizes. In that $80 to $90 per barrel range, markets effectively breathe a sigh of relief. Investors refocus on growth drivers like earnings resilience and AI. Investment and equities outperform particularly cyclical sectors like consumer discretionary financials and industrials. While defensives lie, bond yields fall as inflation expectations decline. All in all, in plain terms, this is a classic risk on environment. The second scenario, ongoing constraints, is a little bit more complicated. Oil stays elevated around $100 to $110 per barrel. Markets can absorb that, we think, but it creates friction. Equities still perform, but with more volatility and less conviction. The S and P is likely to move within a wide 6400 and 6850 range. 80. The near term leadership shifts towards higher quality companies, those with steadier earnings and stronger balance sheets, along with select offensives like healthcare. At the same time, credit markets start to really feel the strain, with spreads widening in general underperformance. The third scenario, effective closure, is where the backdrop really changes. With oil above $150 per barrel, the focus shifts from inflation to growth risk investors will move into what we call a recession playbook, dialing back equity exposure and increasing allocations to government bonds and cash. Defensive sectors like utilities, telecoms and energy take the lead. As markets begin to price in higher risk to the earnings cycle, credit conditions tighten sharply, with high yield spreads potentially widening materially. What makes this environment especially challenging is how everything connects. In a typical cycle, bonds help offset equity losses, but in an oil shock, that relationship can break down because inflation is rising at the same time growth is slowing. That's what we usually call a stagflationary setup, and it makes diversification harder just when investors need it. Most currencies are reacting as well. In a more severe shock, the US dollar strengthens with Eurodollar potentially falling towards 113, while safe haven currencies like the Swiss Franc outperform. In a de escalation scenario, Eurodollar can move back above 117 as risk sentiment improves. Importantly, markets have adjusted over the past month. Equity valuations at one point was down about 15% on a forward price to earnings basis, suggesting that a large part of the risk was being priced in. At the same time, sentiment has improved from deeply negative levels, especially over the last few days, even as volatility remains closely tied to oil. Thanks for listening. If you enjoy the show, please leave us A review wherever you listen and share thoughts on the market with a friend or colleague today.
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