Oil's drop could leave a
stain on earnings
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[June 24, 2017]
By Caroline Valetkevitch and Rodrigo Campos
NEW YORK (Reuters) - Heading into
second-quarter earnings season, investors are looking for a continuation
of strong U.S. company results to justify high stock valuations, now
trading near their loftiest levels since 2004.
However, drilling a hole into that hopeful scenario is the current bear
market in oil prices and an economy showing signs of growth below the
pace expected earlier in the year.
"A lot of the expectation for a recovery in earnings is predicated on
oil prices being around $47-$50 a barrel," said Hugh Johnson, chief
investment officer of Hugh Johnson Advisors LLC in Albany, New York. "So
if you don't get those numbers, you don't get the strong earnings the
stock market needs. This is not trivial stuff. It creates a lot of
uncertainty and volatility in forecasts."
U.S. crude futures <CLc1> have been pressured lower by a supply glut.
They've averaged over $48 per barrel so far this quarter, but traded
around $43 on Friday and are down more than 20 percent from February,
when they hit an 18-month high.
U.S. stocks are in the ninth year of a bull run which has been fueled of
late by bets on pro-growth policies from U.S. President Donald Trump.
However, with the timetable for reforms stretching further into the
future, earnings are seen as a critical support for stock prices.
With indexes near record highs, there is speculation among Wall Street
analysts about whether a correction is due.
Earnings expectations have dropped for 10 of 11 industry groups since
early April, with only industrials looking better than they did then.
The benchmark S&P 500 stock index as a whole is expected to deliver 7.9
percent profit growth, down from 15.3 percent in the first quarter, and
below the 10.2 percent forecast in April, Thomson Reuters data shows.
On Thursday, Nike <NKE.N> will be the first Dow component to report
earnings for the most recent quarter. The season heats up in the second
week of July.
Technology earnings are seen posting double-digit growth, helped by
gains in semiconductor companies, and financials are close behind with
estimated 8.1-percent profit growth.
While lower energy prices can help some sectors such as industrials and
transports, as well as boosting consumer sentiment, high expectations
for energy earnings growth mean any stumble will be felt broadly.
Energy sector profits are seen up a whopping 683 percent from a year
ago, when many companies posted losses, according to Thomson Reuters
data. Without energy, profit growth estimates drop to 4.8 percent for
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Traders work on the floor of the New York Stock Exchange shortly
after the opening bell in New York, U.S., June 22, 2017.
Expectations for the sector will probably have to come down for the second half
of the year if low oil prices persist, said David Joy, chief market strategist
at Ameriprise Financial in Boston.
"The one wild card right now is the price of oil. Expectations that are baked
into full-year forecasts assume a higher price for oil certainly than we have
now," he said.
Energy has been the weakest performing sector so far this year, with the S&P
energy index <.SPNY> down near 15 percent.
The drop in oil prices notwithstanding, some analysts have cautioned that Wall
Street has been too optimistic about overall earnings.
Michael Purves, chief global strategist at Weeden & Co, cut his 2017 S&P 500
earnings estimates from $127 to $116, below the $131.51 consensus, as economic
growth and inflation are not as high as expected.
"I'm looking for CEOs to start taking down their forecasts for the year," Purves
In fact, the Citigroup U.S. economic surprise index <.CESIUSD>, a gauge of
economic data compared to expectations, this month fell near a six-year low.
An Atlanta Federal Reserve model recently forecast second-quarter economic
growth coming in at a 2.9-percent annualized pace, down from a previous 3.2
Another hurdle for earnings growth: declining corporate buybacks.
"Over the past two years, more than 20 percent of S&P 500 issues have given at
least a 4 percent tailwind for (earnings per share) via reduced share counts,"
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in a
For the first quarter of 2017, that rate fell to 14.8 percent of companies, and
there are indications of "even less support" in the second quarter, he said.
(Additional reporting and editing by Megan Davies; Editing by Daniel Bases and
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