Rising Oil Prices are Squeezing Consumers—Here's How to Protect Your Portfolio

The U.S. equity market's recent volatility has investors asking a critical question: Can the S&P 500 sustain its gains as oil prices surge and consumer budgets tighten? With crude oil prices hovering near $90 a barrel and the S&P 500 oscillating between hope and fear, now is the time to pivot toward sectors that can weather this storm. Let's break down what's happening and how to position your portfolio for what's ahead.

The Oil-Consumer Squeeze is Real—and It's Hitting Discretionary Spending Hard

Rising energy costs are eating into consumer budgets at a critical time. The reveals a stark divide: Discretionary stocks (think retailers, automakers, and travel companies) have fallen nearly 4% over the past six months, while Utilities and Energy sectors—which are either defensive or energy-linked—have held up better (Utilities +0.4%, Energy -13%*). Wait—Energy? Let me explain.

Why the dip in Energy? Earlier this year, global supply concerns and demand slowdowns pressured oil prices, but recent geopolitical tensions (e.g., Middle East instability) have pushed prices higher. This creates a paradox: Rising oil prices are great for Energy producers but terrible for consumers and discretionary spenders.

Take Walmart's recent warning: In May, the retailer cited “ongoing inflationary pressures” and supply chain costs, directly linking margin pressures to higher energy prices. This is a red flag for sectors like autos, travel, and restaurants.

The S&P 500's Volatility: A Mirror of Economic Uncertainty

The S&P 500's early June performance tells a story of investor indecision. The index rose 1.1% in the first week of June but gave back 0.5% the following week (). This whipsaw action reflects a market torn between two forces:
1. Hope: Strong earnings from tech giants (the “Magnificent Seven”) and a temporary truce in U.S.-China trade wars.
2. Fears: Rising oil prices, a $3 trillion deficit from new tax legislation, and the Federal Reserve's refusal to cut rates.

The Fed's stance is key here. Despite inflation ticking down to 3.4% in May, Federal Reserve Chair Powell has emphasized that “policy adjustments will be data-dependent”—code for “no cuts until we're sure inflation is tamed.” With oil prices adding fuel to the inflation fire, the Fed's patience could prolong market turbulence.

Time to Rebalance: Shift to Energy-Resilient and Defensive Plays

Here's how to navigate this crossroads:

1. Embrace Energy—Yes, Energy

While Energy stocks lagged in early 2025, the sector's fundamentals are improving. Rising oil prices mean higher profit margins for producers, and the sector's 12-month return of 14.6% (despite six-month struggles) shows its long-term appeal. Look to ETFs like XLE (Energy Select Sector SPDR Fund) or top-tier companies like Chevron or Exxon for direct exposure.

2. Double Down on Defensives

Utilities and Health Care are recession-proof plays. Utilities (e.g., DUK—Duke Energy) offer stable dividends and low volatility, while Health Care's韧性 (e.g., UNH—UnitedHealth) shines in slow-growth environments. Avoid biotech-heavy stocks; focus on insurers and pharmaceuticals with steady demand.

3. Cut Back on Discretionary—Temporarily

The Consumer Discretionary sector's -3.7% six-month return isn't a typo. Until oil prices stabilize, avoid retailers like TGT (Target) and automakers like GM. Instead, favor companies with pricing power (e.g., AMZN—Amazon) or those insulated from energy costs (e.g., software stocks).

4. Keep an Eye on the Fed—But Don't Wait

The market's current “no cuts until 2026” pricing assumes the Fed stays hawkish. If oil prices spike further, the Fed could face a tough choice: tolerate higher inflation or risk slowing the economy. Investors shouldn't wait for clarity—act now by rebalancing toward safer sectors.

Final Takeaway: Don't Fight the Oil Trend—Profit From It

The days of indiscriminate buying are over. This isn't 2021; it's a market where sector selection matters more than ever. Use the recent dip in Energy stocks to build positions, lean into defensive plays, and trim discretionary holdings until consumer spending stabilizes.

As I always say: “When in doubt, look to the fundamentals—and right now, the fundamentals say energy and defensives rule.”

Stay aggressive, stay focused—and keep your portfolio resilient.

Note: Past performance does not guarantee future results. Consult your financial advisor before making investment decisions.