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Oil slump may be enough to squash ‘peak earnings’ fears

Scott Gamm
Reporter

The slump in oil prices could not have come at a better time for the stock market.

Analysts are starting to sound the alarm on earnings growth in 2019, and CEOs have been complaining for months about rising input costs.

Strategists are forecasting 7-10% earnings growth in 2019, a slowdown from the 25% growth seen so far in 2018.

“Lower oil prices from $70 to $55 a barrel on West Texas Intermediate will benefit the bottom line of companies, especially amid talk around peak earnings,” said Rich Pontillo, senior director, energy, at Nasdaq IR Intelligence.

While a sustainable slump in oil prices won’t help oil companies, the energy sector only makes up roughly 6% of the S&P 500’s (^GSPC) market cap.

Plus, the slowdown in oil seems to be driven by a supply and not a demand issue, which throws cold water on the argument that the oil price slump is indicative of a looming recession.

“Oil prices rose during the summer from fears of less supply from Iran given upcoming sanctions,” Pontillo noted. “But now, many nations that import Iranian crude have been granted waivers.”

In anticipation of the sanctions, other oil producing nations, like Saudi Arabia and Russia, had raised production leading to an increase in supply and a drop in prices.

West Texas Intermediate prices touched a 2018 intraday high of $76.90 per barrel on Oct. 3 and have since fallen to $56.88, that’s a decline of 26%.

Aside from dampening the worry of ‘peak earnings,’ the slump in oil prices should help calm CEO fears of rising input costs.

“We’re at an inflection point in the corporate community,” Pontillo said. “This past earnings season and the prior one, you saw more commentary on inflation headwinds. If one of those major input costs — oil — are in a deflationary period, that will help companies maintain their margins.”

The sectors set to benefit the most from falling oil prices are the ones that rely on oil to operate their businesses such as airlines, industrials and chemical companies, Pontillo noted.

Plus, investors shouldn’t attribute the recent stock market declines in October and November to oil. Their simultaneous declines are merely a coincidence.

Crude oil and stock prices are not highly correlated at present, regardless of their similar declines,” wrote Nick Colas, co-founder of DataTrek Research in a note to clients Friday. “To our thinking, that’s good news. This means oil prices are more focused on industry-specific supply sentiment, while stocks are wrestling with interest rates and peak earnings chatter.”

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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