Estimating the Impact of Oil Prices and Interest Rates on the S&P 500

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Estimating the Impact of Oil Prices and Interest Rates on the S&P 500

January 6, 2015

by Eric Stubbs

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Two important developments in 2014 will affect U.S. equity markets in 2015:  the precipitous decline in oil prices and increasing expectations that the Fed will begin raising short-term rates sooner rather than later.  But how specifically will these affect our stock market?

Below, I report on the results of an econometric model that I developed to address these questions.  Looking at 15 years of quarterly data, I estimated the impacts of a variety of factors on S&P 500 performance, including oil prices and interest rates.  I estimated impacts on earnings and price-earnings ratio.  The estimated impact on the S&P 500 level is the product of these two.

I conclude that a 25% decline in spot oil prices could reduce the S&P by 6.4% overall, but that the impacts will vary according to sector.  Overall impacts will be positive for consumer discretionary, financial services, information technologies (IT) and utilities.  They will be negative for materials, energy and consumer staples.

A 50 basis point (half-a-percent) parallel move up in interest rates would have a slight positive overall effect on the S&P 500, increasing it by 1.9%.  It would be most positive for IT, financial services and consumer staples.  Utilities, telecomm and consumer discretionary sectors would be negatively impacted.


Two of the most significant stories of the last few months of 2014 for equity investors have been the declining price of oil and the anticipation that the Fed might start raising interest rates before the middle of 2015.

There’s no shortage of opinions about the effects that these developments might have on the U.S. equity market.  Oil price declines might, for instance, have several effects including:

  • Increasing earnings in oil-using sectors
  • Decreasing revenues and earnings in oil producing sectors
  • Increasing consumer discretionary spending and therefore, in GDP growth
  • Increasing the trade-weighted value of the U.S. dollar, reducing exports and increasing imports.

Likewise, rising interest rates may have a number of effects, differing for net borrowers versus savers and depending on whether the increases in short-term rates occur with no impact on the rest of the yield curve, or if the yield curve move is more or less parallel.

These are complicated questions and no solvable by either intuition or simple references to past events that might have been similar.  Consequently, I built a statistical model of drivers of the S&P 500 index to try to estimate these complex effects and assign directions and magnitudes to them.

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