Surging oil prices will likely eat into corporate profit margins in the next few quarters as resistance from customers already feeling the sting of higher prices could prevent companies from fully passing on rising fuel costs.
While earnings growth may slow, strategists and economists said equity markets have largely factored in the possibility of oil touching $50 a barrel, driven up by unabated demand from China and India, and fear of supply shortages from fighting in Iraq and political tension in Venezuela.
"If oil goes up from $50 to $55, the story changes," said Nariman Behravesh, Global Insights chief economist, about corporate earnings. "If it stays in the $40 to $45 range, growth can continue. Otherwise, profit margins will be squeezed."
October Nymex oil futures traded slightly lower on Monday at $46.54 a barrel, after losses on Friday when the September contract in its last day of trade failed to break the $50 level.
Corporate America has experienced strong earnings growth and wider profit margins in the last year, spurred by productivity increases and aggressive cost-cutting that has left some companies with fewer levers to offset the rise in oil prices.
"Most models would suggest that a sustained $10 rise in oil, all other things equal, takes a quarter to one-half per cent off GDP growth after one to three years and a couple percentage points off profit growth over that period," said Andrew Milligan, head of global strategy at Standard Life Investments, which manages assets of about $160 billion.
In the next two to three quarters, higher oil prices will squeeze profits for companies exposed to oil - especially because they are not yet operating in an inflationary climate where they can casually expect to raise prices, said Bill Cheney, chief economist at MSC Global Investment.
The chemical and transportation industries, especially airlines, will take the largest direct hit, but others such as those that depend on discretionary consumer spending will also feel the pain.
Oil's impact on the consumer may squeeze profit margins much more than the direct impact of higher fuel costs.
"If you are trying to sell to a consumer who is getting strapped by higher energy costs, you have no choice but to lower your price or provide an incentive to the consumer to get them active again and that's where a much larger hit to margins could be," said Stephen Gallagher, chief US economist with SG Corporate & Investment Banking.
Pressure on profit margins can reverberate through the economy as companies seek out areas to cut costs, which might be why there has not been much hiring, Mr Cheney said.
Despite the prospect of a corporate profit squeeze, equity markets have factored in such a hit and appear to have priced in a much larger rise in oil prices than has been seen so far, Mr Milligan said.
The Dow Jones industrial average posted its largest percentage weekly rise in 15 months on Friday, with the blue-chip stock index up 2.9 per cent, despite surging oil prices.
"Some estimates are suggesting the equity market has implied negative earns growth for next year, which may tie in with the general view that US and world markets are going to slow," Mr Milligan added. Furthermore, many investors have already prepared for a slowdown from last year's robust earnings growth as companies hit tougher year-ago comparisons in the second half.
But some stock market strategists and fund managers are sceptical the supply and demand scenario can sustain oil above $50, or even drive it to that level, noting that supply has not been interrupted for a long period of time and that global growth - while so far unabated - could decelerate.