Oil

Oil-Price Decline Looms as New Stock-Market Boogeyman

7/1/17
from The Wall Street Journal,
7/1/17:

Collapse in crude prices could end bullish outlook for energy companies and remove boost to broader indexes.

Tumbling oil prices are emerging as the latest threat to the long stock-market rally. U.S. stocks set records in the first half of the year, bolstered by steady economic growth world-wide and the best quarterly earnings among S&P 500 companies in nearly six years. Energy companies are expected to provide the biggest boost in earnings growth of the broad index’s 11 sectors this year, according to analysts surveyed by FactSet, largely due to favorable comparisons with a weak year-ago period. S&P 500 companies are expected to post earnings growth of 9.8% in 2017 compared with a year earlier, according to FactSet. Without energy companies, that figure would fall to 7%. But some investors are concerned that the recent collapse in crude prices could dampen that bullish outlook. As of June 30, analysts expected U.S. crude would trade at an average of $52.76 a barrel in the third quarter and average above $54 in the fourth, according to FactSet. U.S. crude for August delivery closed up 2.5% to $46.04 a barrel on Friday, but oil prices are still down 14% this year. Oil in June entered a bear market, which is typically defined as a decline of 20% or more from a recent peak. Further declines in oil prices could renew concerns about the health of U.S. oil companies, refiners and drillers, whose profits bounced back in the first half of the year after several quarters of contraction. It also could prompt analysts to trim corporate earnings estimates—undermining a key factor that has kept stocks climbing despite reduced expectations for policy changes from Washington, such as tax cuts and fiscal stimulus.

“Clearly the energy sector has felt the impact of falling oil prices already—and if keeps going, corporate earnings will definitely be impacted,” said Omar Aguilar, chief investment officer of equities at Charles Schwab Investment Management. Early last year, a collapse in oil prices spilled over to the stock market, combining with global recession concerns to send shares lower. Stocks look better able to withstand oil-price declines this time around, analysts say.

Perhaps the biggest factor is that the economic picture has changed: When oil prices slid in the second half of 2015 and the start of 2016, investors were contending with a number of risks beyond declining commodity prices, including signs of slowing global growth, shrinking corporate profits and a stronger U.S. dollar. This year, global economic growth is on the mend, with regions from the U.S. to Europe posting their strongest corporate earnings in years. And oil prices remain well off their 2016 trough, when U.S. crude settled at $26.21 a barrel, its lowest since May 2003. “We’re in a very different economic environment, one where we can take a bit of a hit on oil prices without it necessarily affecting the recovery,” Mr. Aguilar said. Many investors also largely consider the latest decline in oil prices to be an issue of oversupply, rather than a sign of waning global demand. “As long as oil finds a floor around $40 a barrel or higher,” earnings should continue growing, said Alan Gayle, director of asset allocation at RidgeWorth Investments.

More From The Wall Street Journal (subscription required):



365 Days Page
Comment ( 0 )
Leave a Reply
Name*
E-mail*
Comment