Russia's invasion of Ukraine has got Wall Street worrying about a recession — here's why, and what role sanctions play

• Russia's invasion of Ukraine has added to concerns on Wall Street that growth in the US could slow sharply and trigger a recession.
• Strategists worry the conflict could send oil prices soaring, adding upward pressure to already red-hot inflation.

Russia's invasion of Ukraine has added to concerns among investors that the US economy could be heading for a recession.

Strategists on Wall Street and in other financial centers worry that the invasion could send oil prices soaring, pushing already red-hot inflation even higher. Prices for wheat and other commodities have also risen sharply.

Stronger inflation could damage growth by denting consumer confidence and by forcing the Federal Reserve to raise interest rates harder than initially expected, analysts said.

"The recent surge in commodity prices may be sufficient in itself to tip the global economy into recession," Albert Edwards, global strategist at Societe Generale, said in a Friday note.

Michael Hartnett, chief investment strategist at Bank of America, said recession risks are on the rise. He thinks the S&P 500 stock index will stand at 4,600 at the end of the year, one of the most pessimistic forecasts on Wall Street, compared with Thursday's close of 4,288.

The Russian invasion of Ukraine should "exacerbate" inflation, which is likely to require more central bank tightening, Hartnett said in a note. He added that high inflation is unlikely to end until the economy is hit with a "recession shock."

Russia invaded Ukraine on Thursday after building up troops on its neighbor's border for months. The move drew swift condemnation from the international community.

The US, UK and Europe all imposed sanctions on Russia, largely targeted at banks. However, they stopped short of attacking its energy industry, fearing such a move could send energy prices rocketing even higher.

Brent crude oil has rallied dramatically in 2022, as supply has struggled to keep up with rebounding demand and as tensions have risen in eastern Europe.

The global benchmark oil price stood at around $77 a barrel at the start of the year. It rose above $105 on Thursday as Russia invaded, before cooling somewhat.

Some investors were already concerned that the Fed's plans to raise interest rates hard in 2022 — to tackle the strongest inflation in 40 years — could lead to a sharp slowdown in growth. For many, the Russia-Ukraine conflict has added to those fears.

Goldman Sachs analysts said oil could hit $125 a barrel in the coming months, if the Russia-Ukraine conflict leads to sharply lower supplies — for example, if the West decides to impose energy sanctions.

And Rystad Energy CEO Jarand Rystad said he thought oil could surge to $130 a barrel, "with consumers feeling the squeeze at the gas pump and in their power bills."

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If Western allies decide to sanction Russia's energy sector, then there could be a "lasting and material negative impact on global growth," UBS Global Wealth Management CIO Mark Haefele said.

However, US stocks rallied Thursday and financial markets steadied Friday, a sign that investors' concerns about the situation were cooling.

The US and the EU's reluctance to impose sanctions on Russian energy exports suggested the economic impact of the conflict could be smaller than expected, analysts said.

US President Joe Biden has vowed to do everything in his power to "limit the pain the American people are feeling at the gas pump."

Lori Calvasina, head of US equity strategy at RBC, said she still expects the S&P 500 to rally to 5,050 by the end of the year, around 17% higher than Thursday's close.

Investors should "be on the lookout for a positive inflection in the stock market, even if it is not at hand just yet," Calvasina said in a note.

However, the reality is that significantly higher energy prices are on the horizon, according to Rystad. The energy consultancy boss said: "Other implications of the conflict pale, compared to the potential human cost on both sides."