Analysis: High energy prices could sink U.S. stocks during earnings season

NEW YORK, June 23 (Reuters) – Skyrocketing oil prices are another headwind to U.S. corporate profits, and some on Wall Street fear it could push stock prices even deeper into the red.

Brent crude has jumped nearly 40% year-to-date and stands at $110.73 a barrel as tight inventories, rising demand and war in Ukraine keep prices near their highest high level since 2014.

Major retailers Target Corp (TGT.N) and Walmart Inc (WMT.N) have previously warned that oil prices are hurting their bottom line. Some investors worry that the impact of oil prices is not yet fully reflected in analysts’ earnings estimates for other companies and could deal a further blow to stocks if those estimates start to fall. Read more

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“On the surface, earnings remain strong, but soaring energy prices could start to squeeze margins through 2022,” said Jason Pride, chief investment officer, Private Wealth, at Glenmede.

The S&P 500 is down 21.1% year-to-date, on track for its worst first half since 1932, according to the S&P Dow Jones indices, as the Fed tightens monetary policy in its fight against the worst inflation in decades.

Overall, every $10 increase in the price of oil reduces global gross domestic product by 0.3%, according to Ned Davis Research. The roughly $30 rise in oil prices since February has shrunk the global economy by 1%, LaForge estimates, leaving the United States on a likely recessionary path this year.

“There’s no avoiding it,” said John LaForge, head of real assets strategy at the Wells Fargo Investment Institute. “When commodities are doing really well, you almost always find that stocks are stuck in a bear market because they are compressing their margins.”

Last month, Walmart said fuel costs were $160 million higher than expected, while Target said it was adding $1 billion to its shipping and freight cost forecast for the year. complete. Read more

Still, there are few signs that analysts are factoring rising fuel costs into estimates. According to data from Refintiv, around 61% of corporate pre-announcements for second-quarter earnings have been negative so far, well behind the 68.7% rate of negative pre-announcements for the prior quarter. Most S&P 500 companies will release their second quarter results after mid-July.

Overall, the S&P 500 is expected to post 5.4% earnings growth in the second quarter, according to Refinitiv. Once the energy companies exit, however, that drops to a 2.2% decline.

Investors indicate that they expect oil prices to remain high. Bullish positions in oil and other commodities are the most popular trade among global investors, according to a BofA Global Research survey.

A Reuters poll showed analysts expect crude oil prices to end the year at $99.52 a barrel and average $91.59 through 2023. /CEPOLL The price of oil has topped $90 a barrel for a total of 22 months over the past 10 years, while mostly trading in the range between $40 and $80, according to Refinitiv data.

BlackRock analysts are among those warning that consensus earnings estimates do not appear to reflect the possibility of energy prices hitting growth. It’s one of the reasons why “we don’t see the pullback in risk assets as a reason to buy the dip – and we expect more volatility to come,” they wrote this week.

Typically, high oil prices can slow the economy and eventually reduce demand, either through a recession or through a change in consumer spending habits. That seems less likely this time around if Russia continues to face energy sanctions for the foreseeable future, said Francisco Blanch, commodities strategist at BofA Europe.

“Even if the world enters a recession, we estimate that Brent could average over $75 a barrel in 2023,” he said.

The S&P 500’s decline this year has so far been largely driven by falling valuations rather than falling estimates as investors focus on the Fed’s aggressive response to inflation, said strategist Garrett Melson. portfolio at Natixis Investment Managers Solutions.

High oil prices will soon reduce overall profits, which will ultimately boost the appeal of big tech companies that don’t rely on broad economic gains like Alphabet, Google’s parent company, he said.

“There is a real risk of margin compression and further downside from here,” he said.

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Reporting by David Randall; Editing by David Gregorio

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