JPMorgan says higher oil prices could spark a 'domino effect' that tanks the S&P 500 by 15%

• JPMorgan sees a "domino effect" from higher oil prices that could cause stocks to plunge.
• The bank warned that oil prices remaining above $90 a barrel could spark a 15% drop in the S&P 500.
• The losses could spread to other markets and hit US growth, the bank said.

There's a chance that the S&P 500's latest sell-off could deepen if oil prices don't edge back down, according to JPMorgan Private Bank.

In a note to clients on Friday, researchers at the bank said they see a risk that higher oil prices could trigger a "domino effect" in equities, a situation in which selling pressure in stocks intensifies as oil prices remain elevated and losses in the US market spread globally, ultimately hitting economic growth.

Brent crude, the international benchmark, has hovered around $100 a barrel all week as oil markets eye supply disruptions in the Middle East.

Should oil prices remain above $90 a barrel for an extended period, that could spark a 10%-15% correction in the S&P 500, with spillover effects in international and emerging markets, the bank wrote.

"As the price rises towards and beyond, say, $120 per barrel, the selling in the S&P 500 will intensify," Kriti Gupta, the bank's executive director, and Joe Seydl, a senior markets economist, said of how the domino effect could worsen the decline in stocks over time.

The domino effect could also continue and hit the US economy, Gupta and Seydl said, pointing to two ways higher oil prices could hurt growth.

On the one hand, Americans are already paying more at the pump. The national average price for a gallon of gas rose to $3.63 on Friday, according to the AAA, up 21% from the start of the US-Iran war.

On the other hand is the wealth effect.

Americans could start reining in spending as they assess the hit to stocks and how much their wealth on paper has been affected. US housheholds owned $56.4 trillion in stocks and mutual fund shares in the third quarter, according to the latest Fed data.

Taken together, 10% decline in the S&P 500 could reduce consumer spending in the US by around 1%, JPMorgan estimated.

"Now, combine it all. The compounded effect of sustainably higher oil prices and an S&P 500 bear market has a destructive demand effect, materially amplifying the hit to growth," Gupta and Seydl said.

Markets have been worried about the sprawling effects of higher oil prices in the two weeks since the Iran war began. The primary concern is that higher crude prices could raise inflation while hurting growth. The pressures are coming at a time when the US economy already looks to be slowing, leading some forecasters to raise their predicted odds of a recession this week, with the Iran war the latest drag.