U.S. energy markets will take most of the hit from geopolitical tensions: Charles Schwab's Gordon

Key Concepts

• Policy Uncertainty/Instability (related to tariffs)
• Tariff Rates (effective vs. peak)
• Labor Market (softening vs. weakening)
• Unemployment Rate
• Export-Import Differential
• GDP Volatility
• Underlying Economic Activity (subsurface)
• Company Earnings (guidance, reactions to tariffs)
• Geopolitical Risk (energy channels, Strait of Hormuz)
• Energy Spending (as percentage of consumer spending)
• Net Oil Exporter/Energy Independence

Impact of Policy Uncertainty and Tariffs

Kevin Gordon of Charles Schwab discusses the impact of policy uncertainty, specifically related to tariffs, on the markets and the economy. He characterizes the situation as more of "instability" than uncertainty. The market's focus has shifted from the potential for higher tariff rates to the fact that the ultimate peak of those rates is likely lower than initially feared. The pause in high tariff rates has been a significant driver of the market's recovery from the April 8th lows.

The key question for the back half of the year and into 2026 is how the market will digest higher effective tariff rates compared to the beginning of the year and how this will ultimately affect the economy, particularly the labor market. Gordon emphasizes the importance of monitoring the line between "softening" and "weakening" in the labor market, with the unemployment rate being a key indicator. Notably, the unemployment rate has risen every month this year (excluding decimal point fluctuations).

Economic Data and GDP Volatility

The export-import differential and inventory levels are expected to be major drivers of GDP volatility throughout the year. The weak headline GDP in the first quarter, despite strong underlying business investment and consumer spending, is an example of this. A potential reversal is anticipated in the second quarter, with a significant jump in GDP due to the export-import data and inventory adjustments. Gordon suggests focusing on the "underlying subsurface activity" rather than solely relying on headline GDP figures. This approach should also be applied to company earnings, focusing on guidance and how companies are managing tariffs.

Companies are reacting differently to tariffs, with some passing costs on to consumers while others absorb them in their margins, depending on their existing buffers.

Geopolitical Risk and Energy

Geopolitical risk, particularly events affecting energy channels like the Strait of Hormuz, is a significant concern. The potential closure or blockage of the Strait of Hormuz could impact global oil shipments and, consequently, the US economy. However, the US has become more energy independent, reducing the pass-through effect of energy price fluctuations to consumers. Energy spending as a percentage of overall consumer spending has decreased from over 9% in 1980 to around 3.4% currently. This shift is attributed to the US becoming a net oil exporter and achieving greater energy dominance.

Synthesis/Conclusion

The key takeaways are that tariff instability and geopolitical risks are creating volatility in the market and the economy. Monitoring the labor market, particularly the distinction between softening and weakening, is crucial. Analyzing underlying economic activity and company-specific responses to tariffs is more important than relying solely on headline GDP or earnings figures. The US's increased energy independence provides some buffer against geopolitical shocks affecting oil prices.