The FTSE 100 has been exceptionally resilient through 2022, down 6% year-to-date to just above the symbolic 7,000-point watermark. However, the index wobbled during the Truss mini-budget, and has lost almost 500 points since mid-August. And further falls may be imminent.

The index’s ability to generate returns is mostly predicated on the performance of the big four banks — HSBC, Lloyds, Barclays, and Santander —, its two oil majors, BP and Shell, and the mining giants including Rio Tinto and Glencore.

But oil, commodities, and banks all see share price falls in recessions. And one may have started already.

FTSE 100: Lloyds share price

By far the highest-volume stock on the FTSE 100, at 43p Lloyds shares have yet to recover to their pre-pandemic heights.

As the UK’s largest mortgage lender, Lloyds is hugely indicative of the FTSE 100 banking stocks. Investors had previously hoped that increasing net interest margins would send the Lloyds share price rocketing. The Bank of England base rate is already at 2.25% and could peak above 5% by mid-2023.

But in Q3 results, Lloyds saw pre-tax profits fall by 25% year-over-year to £1.5 billion, far worse than the 9.5% analyst average fall estimate. This falling profitability was driven by the need for the FTSE 100 bank to put aside £668 million, to cover the potential costs of bad debts as rising rates increase the chances of defaults on loans, credit cards, and mortgages.

And while the bank saw its net interest income rise by 18% to £3.4 billion, it warned this rise was ‘more than offset by the impairment charge in light of the deterioration in the macroeconomic outlook.’ For perspective, analysts had expected only £285 million to be set aside.

Lloyds holds £456.3 billion in loans and advances, with circa £300 billion held in its open mortgage book. And this mortgage debt could turn risky. While ONS figures show the average UK house price rose to £296,000 in August, HMRC figures show that the number of homes sold last month fell by 37% compared to September 2021.

Accordingly, Lloyds predicts house prices will fall by 7.9% in 2023, and by nearly 18% in a worst-case scenario. However, CEO Charlie Nunn argues that Lloyds is positioned ‘well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders.’

And CFO William Chalmers concurs, advising that the FTSE 100 bank is ‘deliberately ensuring that we lend to customers who are best placed to withstand potential future stresses on the macro level and in their own personal circumstances.’

FTSE 100: Shell share price

Shell shares have soared by 5% today to 2,418p. Now up 42% year-to-date, the FTSE 100 oil major has seen global profits rise to over $30 billion in 2022. Q3 profits alone have more than doubled year-over-year from $4.1 billion to $9.5 billion in Q3 2022.

With gas prices falling, Shell could not quite match the record $11.5 billion quarterly profit it generated in Q2. But the FTSE 100 company still plans to conduct an additional $4 billion of share buybacks by February 2023, with shareholders having already received $14.2 billion in the first half of the year.

But in the energy industry, the winds of fortune change fast. While still at historically high prices, Brent Crude has already fallen to $95 per barrel, while natural gas prices are 70% lower than their August peak.

Further, CEO Ben van Beurden has previously described the prospects of increased windfall taxes as ‘inevitable.’ The FTSE 100 oil producer has paid no windfall tax yet, as every £1 spent on North Sea investment reduces the increased tax liability by 91p. And unsurprisingly, Shell’s British corporate entity has chosen to invest heavily in North Sea drilling this year.

Despite expecting to pay some additional tax next year, CFO Sinead Gorman has confirmed that ‘heavy capex has meant that we haven’t had extra tax coming through in this quarter yet…we simply are investing more heavily than we have, and therefore we don’t have profits which we can be taxed against.’

With domestic energy bills set to skyrocket to above £4,000pa when universal government support ceases in April, and mortgages already rising substantially, the prospects of further windfall taxes through a severe recession are rising.

And the FTSE 100 could react accordingly.

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