Oil prices significantly affect the earnings expected in each industry across the board and consequently the prices of various commodities. As we approach the second-quarter, stock investors will have a keen eye on the listed company’s earnings and speculate strong financial results, a continuation of the valuations which have been trading on their all-time high since 2004.
However, the over-confident financial predictions which are not turning out to be as realistic and the bearish oilmarket threaten the speculations of higher earnings than the previous year.
The drop in oil prices have been occasioned by an excess in supply of the commodity whose price has been averaging over $48 per barrel so far in this quarter, but traded around $43 per barrel on Friday and are over 20 percent down from February where they hit an all-time 18 month high.
“A lot of the expectation for recovery in earnings is predicated on oil prices being around $47-$50a barrel,” says Hugh Johnson, chief investment officer of Hugh Johnson Advisors. The US stocks, which are on their ninth year bull run, are stimulated by pro-growth policies pegged in President Trump’s manifesto and which are long term.
In the first quarter, the market benchmark, S&P 500 index were in their loftiest. Economists are of the opinion that a correction is due. Despite this trend, the earnings in 10 out of 11 industries have dropped.
Moreover, the S&P 500 stock index is expected to deliver 7.9 percent profit growth down from 15.3 percent in the first quarter,which is 5.1 percent less the anticipated 10.2 percent in April.
Top gainers in the board were; the energy sector which saw an outrageous 683 percent growth from a year ago when companies experienced massive losses and the technology industry that recorded a double digit growth and had an estimated 8.1 percent growth in profit according to data from Thomas Reuters.
Energy being a central industry, its omission would see a 4.8 percent profit drop estimate in the second quarter. ”The one wild card right now is the price of oil. Expectations that are baked into full year forecast assume a higher price for oil certainly than we have now,” said David Joy, the chief market strategist at Ameriprise Financial on the effect of persisting low oil prices.
This concurs with an Atlanta Federal Reserve model forecast with economic growth coming at 2.9 percent down annualized pace from the previous 3.2 percent. Decline in corporate buybacks has also significantly reduced earnings trajectory.
“Over the past two years, more than 20 percent of S&P 500 issues have given at least 4 percent tailwind via reduced share counts,” said Howard, a senior analyst at S&P Dow Jones Indices. He adds that in the first quarter, the rate decreased to 14.8 percent of companies and there are speculations of less support in the second quarter.