Will the Stock Market Crash as the Oil Shock Hits the Economy? History Says the S&P 500 Will Do This Next.

The U.S. stock market stumbled to start the year as investors contemplated weakness in the jobs market and a slowing economy. But the drawdown shifted into high gear when the U.S. launched military action against Iran, setting in motion a sequence of events that has pushed oil prices to a multiyear high.

The S&P 500 (^GSPC +0.11%) is currently 6% below its record high, but history says the index could fall much further. The average price per gallon of gasoline recently topped $4 for the first time since 2022. Past incidents where that threshold was broken have always been accompanied by substantial drawdowns in the stock market.

Here’s what investors should know.

The average gasoline price just hit $4 per gallon for the third time in history

The U.S.-Iran war has effectively closed the Strait of Hormuz, a waterway in the Persian Gulf that serves as a transit route for about 20 million barrels of oil each day, representing more than 20% of global supply.

Since the conflict began in late February, WTI crude oil futures (the primary benchmark for U.S. oil prices) have increased nearly 90% to $112 per barrel. Oil has not been so expensive since June 2022. And consumers are already paying more at gas stations nationwide.

As of April 5, the average price per gallon of regular gasoline was $4.11 per gallon, the highest level in four years. In fact, the national average has only topped $4 per gallon during two periods in history: the summer of 2008, and the spring and summer of 2022.

History says the stock market could fall sharply

Consumer spending is the main engine of economic expansion. When gas prices increase, consumers have less money to spend elsewhere, which creates a drag on GDP growth. The stock market is a reflection of the economy, so the S&P 500 can fall sharply when gas prices rise.

Indeed, the S&P 500 suffered a bear market both times the average gas price topped $4 per gallon in the past, with an average peak-to-trough decline of 41%. So, while the S&P 500 is only 6% below its record high today, history says the index could decline much further.

Goldman Sachs strategists recently warned that persistent disruptions to global oil supplies could drag the S&P 500 down to 5,400 in 2026. That prediction represents a 22% decline from its January peak of 6,979, meaning the index would enter a bear market.

In March, Moody’s chief economist Mark Zandi warned, “If oil prices remain elevated for much longer (weeks and not months), a recession would be difficult to avoid.” That hints at even more substantial drawdown in the stock market. The S&P 500 suffered an average peak-to-trough decline of 32% during past recessions.

The smartest move investors can make right now

Right now, the stock market is a precarious position. Crude oil prices have nearly doubled in the last month and the economic impact intensifies each day. While consumers initially feel the pinch at gas stations, other goods will eventually become more expensive as high oil prices drive up manufacturing and transportation costs.

That domino effect could certainly lead to a market crash. Nevertheless, the best decision investors can make right now is to selectively buy reasonably priced stocks whose earnings are likely to be much higher in five years. The S&P 500 may fall further in the coming weeks, but the market has eventually recouped its losses from every past drawdown and there is no reason to think this one will end differently.